G.R. No.

155683

February 16, 2007

PETRON CORPORATION, Petitioner,

vs.
NATIONAL COLLEGE OF BUSINESS AND ARTS, Respondent.
DECISION
CORONA, J.:
The sole question raised in this petition for review on certiorari1 is whether petitioner
Petron Corporation (Petron) should be held liable to pay attorneys fees and exemplary
damages to respondent National College of Business and Arts (NCBA).
This case, however, is but part of a larger controversy over the lawful ownership of seven
parcels of land2 in the V. Mapa area of Sta. Mesa, Manila (the V. Mapa properties) that
arose out of a series of events that began in 1969.3
Sometime in 1969, the V. Mapa properties, then owned by Felipe and Enrique Monserrat,
Jr., were mortgaged to the Development Bank of the Philippines (DBP) as part of the
security for the P5.2 million loan of Manila Yellow Taxicab Co., Inc. (MYTC) and
Monserrat Enterprises Co. MYTC, for its part, mortgaged four parcels of land located in
Quiapo, Manila.
On March 31, 1975, however, Felipes undivided interest in the V. Mapa properties was
levied upon in execution of a money judgment rendered by the Regional Trial Court
(RTC) of Manila in Filoil Marketing Corporation v. MYTC, Felipe Monserrat, and
Rosario Vda. De Monserrat (the Manila case).4 DBP challenged the levy through a thirdparty claim asserting that the V. Mapa properties were mortgaged to it and were, for that
reason, exempt from levy or attachment. The RTC quashed it.
On June 18, 1981, MYTC and the Monserrats got DBP to accept a dacion en pago
arrangement whereby MYTC conveyed to the bank the four mortgaged Quiapo properties
as full settlement of their loan obligation. But despite this agreement, DBP did not release
the V. Mapa properties from the mortgage.
On May 21, 1982, Felipe, acting for himself and as Enriques attorney-in-fact, sold the V.
Mapa properties to respondent NCBA. Part of the agreement was that Felipe and Enrique
would secure the release of the titles to the properties free of all liens and encumbrances
including DBPs mortgage lien and Filoils levy on or before July 31, 1982. But the
Monserrats failed to comply with this undertaking. Thus, on February 3, 1983, NCBA
caused the annotation of an affidavit of adverse claim on the TCTs covering the V. Mapa
properties.
Shortly thereafter, NCBA filed a complaint against Felipe and Enrique for specific

performance with an alternative prayer for rescission and damages in the RTC of Manila.
The case was raffled to Branch 30 and docketed as Civil Case No. 83-16617. On March
30, 1983, NCBA had a notice of lis pendens inscribed on the TCTs of the V. Mapa
properties. A little over two years later, NCBA impleaded DBP as an additional defendant
in order to compel it to release the V. Mapa properties from mortgage.
On February 28, 1985, during the pendency of Civil Case No. 83-16617, Enriques
undivided interest in the V. Mapa properties was levied on in execution of a judgment of
the RTC of Makati (the Makati case)5 holding him liable to Petron (then known as
Petrophil Corporation) on a 1972 promissory note. On April 29, 1985, the V. Mapa
properties were sold at public auction to satisfy the judgments in the Manila and Makati
cases. Petron, the highest bidder, acquired both Felipes and Enriques undivided interests
in the property. The final deeds of sale of Enriques and Felipes shares in the V. Mapa
properties were awarded to Petron in 1986. Sometime later, the Monserrats TCTs were
cancelled and new ones were issued to Petron. Thus it was that, towards the end of 1987,
Petron intervened in NCBAs suit against Felipe, Enrique and DBP (Civil Case No. 8316617) to assert its right to the V. Mapa properties.
The RTC rendered judgment on March 11, 1996.6 It ruled, among other things, that
Petron never acquired valid title to the V. Mapa properties as the levy and sale thereof
were void and that NCBA was now the lawful owner of the properties. Moreover, the
RTC held Petron, DBP, Felipe and Enrique jointly and severally liable to NCBA for
exemplary damages and attorneys fees for the following reasons:
FELIPE and ENRIQUE had no reason to renege on their undertaking in the Deed of
Absolute Sale "to secure the release of the titles to the properties xxx free from all the
liens and encumbrances, and to cause the lifting of the levy on execution of Commercial
Credit Corporation, Industrial Finance Corporation[,] and Filoil over the V. Mapa
[p]roperty. Moreover, ENRIQUE had no reason to repudiate FELIPE and disavow
authority he had [given] the latter to sell his share in the V. Mapa property.
On the other hand, the mortgage in favor of DBP had been fully extinguished thru dacion
en pago as early as 18 June 1981 but it unjustifiably and whimsically refused to release
the mortgage and to surrender to the buyer (NCBA) the owners duplicate copies of
Transfer Certificates of Title No[s]. 83621 to 83627, thereby preventing NCBA from
registering the sale in its favor.
Similarly, [Petron] has absolutely no reason to claim the V. Mapa property. For, as shown
above, the levy in execution and sale of the shares of FELIPE and ENRIQUE in the V.
Mapa property were null and void.
Finally, in their Memorandum of Agreement dated 25 September 1992 with Technical
Institute of the Philippines, [Petron] and DBP attempted to pre-empt this Courts power to
adjudicate on the claim of ownership stipulating that "to facilitate their defenses and
cause of action in Civil Case No. 83-16617," they agreed on the disposition of the V.
Mapa property among themselves. For obvious reasons, this Court refused to give its

imprimatur and denied their prayer for dismissal of the complaint against DBP.
These acts of defendants and intervenor demonstrate their wanton, fraudulent, reckless,
oppressive and malevolent conduct in their dealings with NCBA. Furthermore, they acted
with gross and evident bad faith in refusing to satisfy NCBAs plainly valid and
demandable claims. Assessment of exemplary damages and attorneys fees in the
amounts of P100,000.00 and P150,000.00, respectively, is therefore in order (Arts. 2208
and 2232, Civil Code).7
Enrique, DBP and Petron appealed to the Court of Appeals (CA). The appeal was
docketed as CAG.R. CV No. 53466. In a decision dated June 21, 2002,8 the CA
affirmed the RTC decision in toto. On motion for reconsideration, Petron and DBP tried
to have the award of exemplary damages and attorneys fees deleted for lack of legal and
factual basis. The Philippine National Oil Company (PNOC), which had been allowed to
intervene in the appeal as transferee pendente lite of Petrons right to the V. Mapa
properties, moved for reconsideration of the ruling on ownership. In a resolution dated
October 16, 2002,9 the CA denied these motions for lack of merit. Thereupon, Petron and
PNOC took separate appeals to this Court.
In this appeal, the only issue is Petrons liability for exemplary damages and attorneys
fees. And on this matter, we reverse the rulings of the trial and appellate courts.
Article 2208 lays down the rule that in the absence of stipulation, attorneys fees cannot
be recovered except in the following instances:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff to litigate with third
persons or to incur expense to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiffs plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;
(8) In actions for indemnity under workmens compensation and employers liability
laws;
(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorneys fees and
expenses of litigation should be recovered.10
Here, the RTC held Petron liable to NCBA for attorneys fees under Article 2208(5),
which allows such an award "where the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiffs plainly valid, just, and demandable claim." However, the
only justification given for this verdict was that Petron had no reason to claim the V.
Mapa properties because, in the RTCs opinion, the levy and sale thereof were void.11
This was sorely inadequate and it was erroneous for the CA to have upheld that ruling
built on such a flimsy foundation.
Article 2208(5) contemplates a situation where one refuses unjustifiably and in evident
bad faith to satisfy anothers plainly valid, just and demandable claim, compelling the
latter needlessly to seek redress from the courts.12 In such a case, the law allows
recovery of money the plaintiff had to spend for a lawyers assistance in suing the
defendant expenses the plaintiff would not have incurred if not for the defendants
refusal to comply with the most basic rules of fair dealing. It does not mean, however,
that the losing party should be made to pay attorneys fees merely because the court finds
his legal position to be erroneous and upholds that of the other party, for that would be an
intolerable transgression of the policy that no one should be penalized for exercising the
right to have contending claims settled by a court of law.13 In fact, even a clearly
untenable defense does not justify an award of attorneys fees unless it amounts to gross
and evident bad faith.14
Petrons claim to the V. Mapa properties, founded as it was on final deeds of sale on
execution, was far from untenable. No gross and evident bad faith could be imputed to
Petron merely for intervening in NCBAs suit against DBP and the Monserrats in order to
assert what it believed (and had good reason to believe) were its rights and to have the
disputed ownership of the V. Mapa properties settled decisively in a single lawsuit.
With respect to the award of exemplary damages, the rule in this jurisdiction is that the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may even consider the question of whether exemplary damages should
be awarded.15 In other words, no exemplary damages may be awarded without the
plaintiffs right to moral, temperate, liquidated or compensatory damages having first
been established. Therefore, in view of our ruling that Petron cannot be made liable to
NCBA for compensatory damages (i.e., attorneys fees), Petron cannot be held liable for
exemplary damages either.
WHEREFORE, the petition is hereby GRANTED. The imposition of liability on Petron
Corporation for exemplary damages and attorneys fees is REVOKED. The June 21,
2002 decision and October 16, 2002 resolution of the Court of Appeals in CAG.R. CV
No. 53466 and the March 11, 1996 decision of the Regional Trial Court of Manila in

Civil Case No. 83-16617 are hereby MODIFIED accordingly.

SO ORDERED.

THIRD DIVISION
[G.R. No. 121171. December 29, 1998]
ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS, JESUS S.
CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE
MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and
MIGUEL M. ANTONIO, as Minority Stock Holders of Marinduque Mining and
Industrial Corporation, respondents.
DECISION
KAPUNAN, J.:
The petition for review on certiorari before us seeks us to reverse and set aside the
decision of the Court of Appeals which denied due course to the petition for certiorari
filed by the Asset Privatization Trust (APT) assailing the order of the Regional Trial
Court (RTC) Branch 62, Makati City. The Makati RTCs order upheld and confirmed the
award made by the Arbitration Committee in favor of Marinduque Mining and Industrial
Corporation (MMIC) and against the Government, represented by herein petitioner APT
for damages in the amount of P2.5 BILLION (or approximately P4.5 BILLION,
including interest).
Ironically, the staggering amount of damages was imposed on the Government for
exercising its legitimate right of foreclosure as creditor against the debtor MMIC as a
consequence of the latters failure to pay its overdue and unpaid obligation of P22 billion
to the Philippine National Bank (PNB) and the Development Bank of the Philippines
(DBP).
The antecedent facts of the case
The development, exploration and utilization of the mineral deposits in the Surigao
Mineral Reservation have been authorized by Republic Act No. 1828, as amended by
Republic Acts No. 2077 and 4167, by virtue of which laws, a Memorandum of
Agreement was drawn on July 3, 1968, whereby the Republic of the Philippines thru the
Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore,
develop and exploit nickel, cobalt and other minerals in the Surigao mineral reservation.
[1] MMIC is a domestic corporation engaged in mining with respondents Jesus S.
Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of
MMIC debenture and extension of guarantees. Further, the Philippine Government
obtained a firm, commitment from the DBP and/or other government financing

institutions to subscribed in MMIC and issue guarantee/s for foreign loans or deferred
payment arrangements secured from the US Eximbank, Asian Development Bank, Kobe
Steel, of amount not exceeding US$100 Million.[2]
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were
based on the unutilized portion of the Government commitment. Thereafter, the
Government extended accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement[3]
whereby MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP
as mortgagees, over all MMICs assets, subject of real estate and chattel mortgage
executed by the mortgagor, and additional assets described and identified, including
assets of whatever kind, nature or description, which the mortgagor may acquire whether
in substitution of, in replenishment, or in addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount secured
by this Mortgage Trust Agreement when due.[4]
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be declared in
default, the procedure therefor, waiver of period to foreclose, authority of Trustee before,
during and after foreclosure, including taking possession of the mortgaged properties.[5]
In various request for advances/remittances of loans of huge amounts, Deeds of
Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages,
MMIC invariably committed to pay either on demand or under certain terms the loans
and accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC had
reached tremendous proportions, and MMIC was having a difficult time meeting its
financial obligations. MMIC had an outstanding loan with DBP in the amount of
P13,792,607,565.92 as of August 31, 1984 and in the amount of P8,789,028,249.38 as of
July 15, 1984 or a total Government exposure of Twenty Two Billion Six Hundred SixtyEight Million Five Hundred Thirty-Seven Thousand Seven Hundred Seventy and 05/100
(P22,668,537,770.05), Philippine Currency.[6] Thus, a financial restructuring plan (FRP)
designed to reduce MMIC' interest expense through debt conversion to equity was drafted
by the Sycip Gorres Velayo accounting firm.[7] On April 30, 1984, the FRP was approved
by the Board of Directors of the MMIC.[8] However, the proposed FRP had never been
formally adopted, approved or ratified by either PNB or DBP.[9]
In August and September 1984, as the various loans and advances made by DBP and
PNB to MMIC had become overdue and since any restructuring program relative to the
loans was no longer feasible, and in compliance with the directive of Presidential Decree
No. 385, DBP and PNB as mortgagees of MMIC assets, decided to exercise their right to
extrajudicially foreclose the mortgages in accordance with the Mortgage Trust

Agreement.[10]
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three
newly formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and
Industrial Corporation, and Island Cement Corporation. In 1986, these assets were
transferred to the Asset Privatization Trust (APT).[11]
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of
MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch
62, for Annulment of Foreclosures, Specific Performance and Damages.[12] The suit,
docketed as Civil Case No. 9900, prayed that the court: (1) annul the foreclosure, restore
the foreclosed assets to MMIC, and require the banks to account for their use and
operation in the interim; (2) direct the banks to honor and perform their commitments
under the alleged FRP; and (3) pay moral and exemplary damages, attorneys fees,
litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP
and PNBs interest in MMIC, mutually agreed to submit the case to arbitration by entering
into a Compromise and Arbitration Agreement, stipulating, inter alia:
NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual
covenants contain herein, the parties agreed as follows:
1. Withdrawal and Compromise. The parties have agreed to withdraw their respective
claims from the Trial Court and to resolve their dispute through arbitration by praying to
the Trial Court to issue a Compromise Judgment based on this Compromise and
Arbitration Agreement.
In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:
(a) their respective money claims shall be reduced to purely money claims; and
(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in
respect of the controversy subject of Civil Case No. 9900 to be transferred to arbitration
and any arbitral award/order against either PNB and/or DBP shall be the responsibility of,
be discharged by and be enforceable against APT, the partied having agreed to drop PNB
and DBP from the arbitration.
2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900
shall be submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in
Civil Case No. 9900 shall, with the approval of the Trial Court of this Compromise and
Arbitration Agreement, be transferred and reduced to pure pecuniary/money claims with
the parties waiving and foregoing all other forms of reliefs which they prayed for or
should have payed for in Civil Case No. 9900.[13]

The Compromise and Arbitration Agreement limited the issues to the following:
5. Issues. The issues to be submitted for the Committees resolution shall be: (a) Whether
PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf
of the MMIC or its directors; (b) Whether or not the actions leading to, and including, the
PNB-DBP foreclosure of the MMIC assets were proper, valid and in good faith.[14]
This agreement was presented for approval to the trial court. On October 14, 1992, the
Makati RTC, Branch 62, issued an order, to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with the Asset Privatization Trust as party defendant.
2. Approving the Compromise and Arbitration Agreement dated October 6, 1992,
attached as Annex C of the Omnibus Motion.
3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in this case
into pure money claims; and
4. The Complaint is hereby DISMISSED.[15]
The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice
Magdangal Elma as Members. On November 24, 1993, after conducting several hearings,
the Arbitration Committee rendered a majority decision in favor of MMIC, the pertinent
portions of which read as follows:
Since, as this Committee finds, there is no foreclosure at all was not legally and validly
done, the Committee holds and so declares that the loans of PNB and DBP to MMIC, for
the payment and recovery of which the void foreclosure sales were undertaken, continue
to remain outstanding and unpaid. Defendant APT as the successor-in-interest of PNB
and DBP to the said loans is therefore entitled and retains the right, to collect the same
from MMIC pursuant to and based on the loan documents signed by MMIC, subject to
the legal and valid defenses that the latter may duly and seasonably interpose. Such loans
shall, however, be reduced by the amount which APT may have realized from the sale of
the seized assets of MMIC which by agreement should no longer be returned even if the
foreclosure were found to be null and void.
The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B;
Exhibits 100; and also Exhibit ZZZ) as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure is
P22,668,537,770.05, more or less.
Therefore, defendant APT can, and is still entitled to, collect the outstanding obligations

of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or less, with interest
thereon as stipulated in the loan documents from the date of foreclosure up to the time
they are fully paid less the proportionate liability of DBP as owner of 87% of the total
capitalization of MMIC under the FRP. Simply put, DBP shall share in the award of
damages to, and in obligations of MMIC in proportion to its 87% equity in the total
capital stock of MMIC.
x x x.
As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to 87%.
So pursuant to the above provision of the Compromise and Arbitration Agreement, the
87% equity of DBP is hereby deducted from the actual damages of P19,486,118,654.00
resulting in the net actual damages of P2,531,635,425.02 plus interest.
DISPOSITION
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation,
except the DBP, the sum of P2,531,635,425.02 with interest thereon at the legal rate of
six per cent (6%) per annum reckoned from August 3, 9, and 24, 1984, pari passu, as and
for actual damages. Payment of these actual damages shall be offset by APT from the
outstanding and unpaid loans of the MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to the MMIC after the offsetting,
the same shall be satisfied from the funds representing the purchase price of the sale of
the shares of Island Cement Corporation in the amount of P503,000,000.00 held under
escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent
escrow agreement that would supercede [sic] it pursuant to paragraph (9) of the
Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation,
except the DBP, the sum of P13,000,000.00 as and for moral and exemplary damages.
Payment of these moral and exemplary damages shall be offset by APT from the
outstanding and unpaid loans of MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to MMIC after the offsetting, the
same shall be satisfied from the funds representing the purchase price of the sale of the
shares of Island Cement Corporation in the of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supercede [sic] it pursuant to paragraph (9) of the Compromise and
Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum of
P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant to the
Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that
would supercede it, pursuant to paragraph (9) of the Compromise and Arbitration
Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.[16]
Motions for reconsiderations were filed by both parties, but the same were denied.
On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an
Application/Motion for Confirmation of Arbitration Award. Petitioner countered with an
Opposition and Motion to Vacate Judgment raising the following grounds:
1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the proceedings
in Civil Case No. 9900 which was dismissed upon motion of the parties. In fact, the
defendants in the said Civil Case No. 9900 were the Development Bank of the
Philippines and the Philippine National Bank (PNB);
2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission shall
be deemed a special proceedings and a party to the controversy which was arbitrated may
apply to the court having jurisdiction, (not necessarily with this Honorable Court) for an
order confirming the award;
3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure proceedings.
The arbitration award sought to be confirmed herein far exceeded the issues submitted
and even granted moral damages to one of the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the award
where the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual final and definite award upon the subject matter submitted to them was not made.
[17]
Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984,
arguing that a dismissal of Civil case No. 9900 was merely a qualified dismissal to pave
the way for the submission of the controversy to arbitration, and operated simply as a
mere suspension of the proceedings. They denied that the Arbitration Committee had
exceeded its powers.
In an Order dated November 28, 1994, the trial court confirmed the award of the
Arbitration Committee. The dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise and
Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration Committee
promulgated on November 24, 1993, as affirmed in a Resolution dated July 26, 1994, and

finally settled and clarified in the Separate Opinion

Committee Member Elma, and the pertinent provisions
Arbitration Law, this Court GRANTS PLAINTIFFS
CONFIRMS THE ARBITRATION AWARD, AND
RENDERED:

dated September 2, 1994 of

of RA 876,also known as the
APPLICATION AND THUS
JUDGMENT IS HEREBY

(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation
(MMIC, except the DBP, the sum of P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds held under escrow in the amount of
P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988. The Balance of
the award, after the escrow funds are fully applied, shall be executed against the APT;
(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of
P13,000,000.00 as and moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00 as
and for moral damages; and
(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum of
P1,705,410.22 as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2 of
the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committees decision, and with this Courts Confirmation, the issuance of the Arbitration
Committees Award shall henceforth be final and executory.
SO ORDERED.[18]
On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition
thereto.
On January 18, 1995, the trial court handed down its order denying APTs motion for
reconsideration for lack of merit and for having been filed out of time. The trial court
declared that considering that the defendant APT through counsel, officially and actually
received a copy of the Order of this Court dated November 28, 1994 on December 6,
1994, the Motion for Reconsideration thereof filed by the defendant APT on December
27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15-day reglementary
period prescribed or provided for by law for the filing of an appeal from final orders,
resolutions, awards, judgments or decisions of any court in all cases, and by necessary
implication for the filling of a motion for reconsideration thereof.
On February 7, 1995, petitioner received private respondents motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari

with temporary restraining order and/or preliminary injunction dated February 13, 1996
to annul and declare as void the Orders of the RTC-Makati dated November 28, 1994 and
January 18, 1995 for having been issued without or in excess of jurisdiction and/or with
grave abuse of discretion.[19] As ground therefor, petitioner alleged that:
I
THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION
MUCH LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL
AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900,
HAD PREVIOUSLY BEEN DISMISSED.
II
THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE
QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND DENYING
THE MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III
THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED
WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING
THE COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION,
NOT FROM THE DATE OF SERVICE OF THE COURTS COPY CONFIRMING THE
AWARD, BUT FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS
THE OPPOSING COUNSELS COPY THEREOF.[20]
On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and
dismissed the petition for certiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the
following errors.
ASSIGNMENT OF ERRORS
I
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI
REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY DISMISSED
CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL
AWARD UNDER THE SAME CIVIL CASE AND IN NOT RULING THAT THE
APPLICATION FOR CONFIRMATION SHOULD HAVE BEEN FILED AS A NEW
CASE TO BE RAFFLED OFF AMONG THE DIFFERENT BRANCHES OF THE RTC.
II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER

WAS ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN
PETITIONER QUESTIONED THE JURISDICTION OF THE RTC-MAKATI,
BRANCH 62 AND AT THE SAME TIME MOVED TO VACATE THE ARBITRAL
AWARD.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT
TRIAL COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE
RESPONDENTS MOTION/PETITION FOR CONFIRMATION OF ARBITRATION
AWARD AND/OR SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION
TO VACATE ARBITRAL AWARD.
IV
THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS
PETITION FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER
CONFIRMING THE AWARD
V
THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF
WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]
The petition is impressed with merit.
I
The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award
The use of the term dismissed is not a mere semantic imperfection. The dispositive
portion of the Order of the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED.[22]
The term dismiss has a precise definition in law. To dispose of an action suit, or motion
without trial on the issues involved. Conclude, discontinue, terminate, quash.[23]
Admittedly the correct procedure was for the parties to go back to the court where the
case was pending to have the award confirmed by said court. However, Branch 62 made
the fatal mistake of issuing a final order dismissing the case. While Branch 62 should
have merely suspended the case and not dismissed it,[24] neither of the parties questioned
said dismissal. Thus, both parties as well as said court are bound by such error.

It is erroneous then to argue, as private respondents do, that petitioner APT was charged
with the knowledge that the case was merely stayed until arbitration finished, as again,
the order of Branch 62 in very clear terms stated that the complaint was dismissed. By its
own action, Branch 62 had lost jurisdiction over the vase. It could not have validly
reacquired jurisdiction over the said case on mere motion of one of the parties. The Rules
of Court is specific on how a new case may be initiated and such is not done by mere
motion in a particular branch of the RTC. Consequently, as there was no pending action
to speak of, the petition to confirm the arbitral award should have been filed as a new
case and raffled accordingly to one of the branches of the Regional Trial Court.
II
Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of
Makati.
The Court of Appeals ruled that APT was already estopped to question the jurisdiction of
the RTC to confirm the arbitral award because it sought affirmative relief in said court by
asking that the arbitral award be vacated.
The rule is that Where the court itself clearly has no jurisdiction over the subject matter or
the nature of the action, the invocation of this defense may de done at any time. It is
neither for the courts nor for the parties to violate or disregard that rule, let alone to
confer that jurisdiction, this matter being legislative in character.[25] As a rule the,
neither waiver nor estoppel shall apply to confer jurisdiction upon a court barring highly
meritorious and exceptional circumstances.[26] One such exception was enunciated in
Tijam vs. Sibonghanoy,[27] where it was held that after voluntarily submitting a cause
and encountering an adverse decision on the merits, it is too late for the loser to question
the jurisdiction or power of the court."
Petitioners situation is different because from the outset, it has consistently held the
position that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award;
consequently, it cannot be said that it was estopped from questioning the RTCs
jurisdiction. Petitioners prayer for the setting aside of the arbitral award was not
inconsistent with its disavowal of the courts jurisdiction.
III
Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.
The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts
denial of APTs motion for reconsideration of the trial courts order confirming the arbitral
award, on the ground that said motion was filed beyond the 15-day reglementary period;
consequently, the petition for certiorari could not be resorted to as substitute to the lost
right of appeal.

We do not agree.
Section 29 of Republic Act No. 876,[28] provides that:
x x x An appeal may be taken from an order made in a proceeding under this Act, or from
a judgment entered upon an award through certiorari proceedings, but such appeals shall
be limited to question of law. x x x.
The aforequoted provision, however, does not preclude a party aggrieved by the arbitral
award from resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules
of Court where, as in this case, the Regional Trial Court to which the award was
submitted for confirmation has acted without jurisdiction, or with grave abuse of
discretion and there is no appeal, nor any plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising judicial
functions, has acted without or in excess of its or his jurisdiction, or with grave abuse of
discretion and there is no appeal, nor any plain, speedy, and adequate remedy in the
ordinary course of law, a person aggrieved thereby may file a verified petition in the
proper court alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings, as the law requires, of such tribunal, board or
officer.
In the instant case, the respondent court erred in dismissing the special civil action for
certiorari, it being from the pleadings and the evidence that the trial court lacked
jurisdiction and/or committed grave abuse of discretion in taking cognizance of private
respondent motion to confirm the arbitral award and, worse, in confirming said award
which is grossly and patently not in accord with the arbitration agreement, as will be
hereinafter demonstrated.
IV
The nature and limits of the Arbitrators powers.
As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either
as to the law or as to the facts.[29] Courts are without power to amend or overrule merely
because of disagreement with matters of law or facts determined by the arbitrators.[30]
They will not review the findings of law and fact contained in an award, and will not
undertake to substitute their judgment for that of the arbitrators, since any other rule
would make an award the commencement, not the end, of litigation.[31] Errors of law
and fact, or an erroneous decision of matters submitted to the judgment of the arbitrators,
are insufficient to invalidate an award fairly and honestly made.[32] Judicial review of an
arbitration is, thus, more limited than judicial review of a trial.[33]
Nonetheless, the arbitrators awards is not absolute and without exceptions. The arbitrators

cannot resolve issues beyond the scope of the submission agreement.[34] The parties to
such an agreement are bound by the arbitrators award only to the extent and in the
manner prescribed by the contract and only if the award is rendered in conformity thereto.
[35] Thus, Sections 24 and 25 of the Arbitration Law provide grounds for vacating,
rescinding or modifying an arbitration award. Where the conditions described in Articles
2038,[36] 2039[37] and 2040[38] of the Civil Code applicable to compromises and
arbitration are attendant, the arbitration award may also be annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:
x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators awards is not absolute and without exceptions. Where the conditions described
in Articles 2038, 2039, and 2040 applicable to both compromises and arbitration are
obtaining, the arbitrators' award may be annulled or rescinded. Additionally, under
Sections 24 and 25, of the Arbitration Law, there are grounds for vacating, modifying or
rescinding an arbitrators award. Thus, if and when the factual circumstances referred to in
the above-cited provisions are present, judicial review of the award is properly warranted.
Accordingly, Section 20 of R.A. 876 provides:
SEC. 20. Form and contents of award. The award must be made in writing and signed and
acknowledged by a majority of the arbitrators, if more than one; and by the sole
arbitrator, if there is only one. Each party shall be furnished with a copy of the award.
The arbitrators in their award may grant any remedy or relief which they deem just and
equitable and within the scope of the agreement of the parties, which shall include, but
not be limited to, the specific performance of a contract.
xxx
The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such disputes.
(Underscoring ours).
xxx.
Section 24 of the same law enumerating the grounds for vacating an award states:
SEC. 24. Grounds for vacating award. In any one of the following cases, the court must
make an order vacating the award upon the petition of any party to the controversy when
such party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing

upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the
controversy; that one or more of the arbitrators was disqualified to act as such under
section nine hereof, and willfully refrained from disclosing such disqualifications or any
other misbehavior by which the rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not made.
(Underscoring ours).
xxx.
Section 25 which enumerates the grounds for modifying the award provides:
SEC. 25. Grounds for modifying or correcting award In anyone of the following cases,
the court must make an order modifying or correcting the award, upon the application of
any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted to them, not affecting
the merits of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been
amended or disregarded by the court.
x x x.
Finally, it should be stressed that while a court is precluded from overturning an award
for errors in determination of factual issues, nevertheless, if an examination of the record
reveals no support whatever for the arbitrators determinations, their award must be
vacated.[40] In the same manner, an award must be vacated if it was made in manifest
disregard of the law.[41]
Against the backdrop of the foregoing provisions and principles, we find that the
arbitrators came out with an award in excess of their powers and palpably devoid of
factual and legal basis.
V
There was no financial structuring program; foreclosure of mortgage was fully justified.
The point need not be belabored that PNB and DBP had the legitimate right to foreclose
of the mortgages of MMIC whose obligations were past due. The foreclosure was not a
wrongful act of the banks and, therefore, could not be the basis of any award of damages.

There was no financial restructuring agreement to speak of that could have constituted an
impediment to the exercise of the banks right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who
wrote a separate opinion:
1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to establish that
MMIC has not been complying with the terms of the loan agreement. Restructuring
simply connotes that the obligations are past due that is why it is restructurable;
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it only
means that MMIC had been informed or notified that its obligations were past due and
that foreclosure is forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the
FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly in
behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed the FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith but
with honest and sincere belief that foreclosure was the only alternative; a decision further
explained by Dr. Placido Mapa who testified that foreclosure was, in the judgment of
PNB, the best move to save MMIC itself.
Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as Exh.
37-A for the respondent, may I know from you, Dr. Mapa what you meant by that the
decision to foreclose was neither precipitate nor arbitrary?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty
considerations of the information that we have received, and listening to the prospects
which reported to us that we had assumed would be the premises of the financial
rehabilitation plan was not materialized nor expected to materialized.
Q : And this statement that it was premised upon the known fact that means, it was
referring to the decision to foreclose, was premised upon the known fact that the
rehabilitation plan earlier approved by the stockholders was no longer feasible, just what
is meant by no longer feasible?
A : Because the revenue that they were counting on to make the rehabilitation plan
possible, was not anymore expected to be forthcoming because it will result in a short fall
compared to the prices that were actually taking place in the market.
Q : And I supposed that was you were referring to when you stated that the production
targets and assumed prices of MMICs products, among other projections, used in the
financial reorganization program that will make it viable were not met nor expected to be
met?

A : Yes.
xxx
Which brings me to my last point in this separate opinion. Was PNB and DBP absolutely
unjustified in foreclosing the mortgages?
In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of this.
When MMIC adopted a restructuring program for its loan, it only meant that these loans
were already due and unpaid. If these loans were restructurable because they were
already due and unpaid, they are likewise forecloseable. The option is with the PNB-DBP
on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option
to foreclose. Neither does it mean that the FRP is legally binding and implementable. It
must be pointed that said FRP will, in effect, supersede the existing and past due loans of
MMIC with PNB-DBP. It will become the new loan agreement between the lenders and
the borrowers. As in all other contracts, there must therefore be a meeting of minds of the
parties; the PNB and DBP must have to validly adopt and ratify such FRP before they can
be bound by it; before it can be implemented. In this case, not an iota of proof has been
presented by the PLAINTIFFS showing that PNB and DBP ratified and adopted the FRP.
PLAINTIFFS simply relied on a legal doctrine of promissory estoppel to support its
allegation in this regard.[42]
Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No.
385, which took effect on January 31, 1974. The decree requires government financial
institutions to foreclose collaterals for loans where the arrearages amount to 20% of the
total outstanding obligations. The pertinent provisions of said decree read as follows:
SEC. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or
securities for any loan, credit, accommodations, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other charges,
amount to at least twenty percent (20%) of the total outstanding obligations, including
interest and other charges, as appearing in the books of account and/or related records of
the financial institutions concerned. This shall be without prejudice to the exercise by the
government financial institutions of such rights and/or remedies available to them under
their respective contracts with their debtor, including the right to foreclosure on loans,
credits, accommodations and/or guarantees on which the arrearages are less than twenty
percent (20%).
SEC. 2. No restraining order, temporary or permanent injunction shall be issued by the
court against any government financial institution in any action taken by such institution
in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such

restraining order, temporary or permanent injunction is sought by the borrower(s) or any

third party or parties, except after due hearing in which it is established by the borrower
and admitted by the government financial institution concerned that twenty percent (20%)
of the outstanding arrearages has been paid after the filing of foreclosure proceedings.
(Underscoring supplied.)
Private respondents thesis that the foreclosure proceedings were null and void because of
lack of publication in the newspaper is nothing more than a mere unsubstantiated
allegation not borne out by the evidence. In any case, a disputable presumption exists in
favor of petitioner that official duty has been regularly performed and ordinary course of
business has been followed.[43]
VI
Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the
facts of the case, the arbitrators in making the award went beyond the arbitration
agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed
for judgment in their favor:
1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of
MMIC null and void and directing said defendants to restore the foreclosed assets to the
possession of MMIC, to render an accounting of their use and/or operation of said assets
and to indemnify MMIC for the loss occasioned by its dispossession or the deterioration
thereof;
2. Directing the defendants DBP and PNB to honor and perform their commitments under
the financial reorganization plan which was approved at the annual stockholders meeting
of MMIC on 30 April 1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the plaintiffs
actual damages consisting of the loss of value of their investment amounting to not less
than P80,000,000.00, the damnum emerges and lucrum cessans in such amount as may be
establish during the trial, moral damages in such amount as this Honorable Court may
deem just and equitable in the premises, exemplary damages in such amount as this
Honorable Court may consider appropriate for the purpose of setting an example for the
public good, attorneys fees and litigation expenses in such amounts as may be proven
during the trial, and the costs legally taxable in this litigation.
Further, Plaintiffs pray for such other reliefs as may be just and equitable in the premises.
[44]
Upon submission for arbitration, the Compromise and Arbitration Agreement of the
parties clearly and explicitly defined and limited the issues to the following:

(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative
suit in behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of the
MMIC assets were proper, valid and in good faith.[45]
Item No. 8 of the Agreement provides for the period by which the Committee was to
render its decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than six (6)
months from the date of its constitution.
In the event the committee finds that PLAINTIFFS have the personality to file this suit
and extra-judicial foreclosure of the MMIC assets wrongful, it shall make an award in
favor of the PLAINTIFFS (excluding DBP), in an amount as may be established or
warranted by the evidence which shall be payable in Philippine Pesos at the time of the
award. Such award shall be paid by the APT or its successor-in-interest within sixty (60)
days from the date of the award in accordance with the provisions of par. 9 hereunder. x x
x. The PLAINTIFFS remedies under this Section shall be in addition to other remedies
that may be available to the PLAINTIFFS, all such remedies being cumulative and not
exclusive of each other.
On the other hand, in case the arbitration committee finds that PLAINTIFFS have no
capacity to sue and/or that the extra-judicial foreclosure is valid and legal, it shall also
make an award in favor of APT based on the counterclaims of DBP and PNB in an
amount as may be established or warranted by the evidence. This decision of the
arbitration committee in favor of APT shall likewise finally settle all issues regarding the
foreclosure of the MMIC assets so that the funds held in escrow mentioned in par. 9
hereunder will thus be released in full in favor of APT.[46]
The clear and explicit terms of the submission notwithstanding, the Arbitration
Committee clearly exceeded its powers or so imperfectly executed them: (a) in ruling on
and declaring valid the FRP; (b) in awarding damages to MMIC which was not a party to
the derivative suit; and (c) in awarding moral damages to Jesus S. Cabarrus, Sr.
The arbiters overstepped their powers by declaring as valid proposed Financial
Restructuring Program.
The Arbitration Committee went beyond its mandate and thus acted in excess of its
powers when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to
the validity of the foreclosure and to transform the reliefs prayed for therein into pure
money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to

the proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the
consent of the parties thereto.[47] The contract must bind both contracting parties.[48]
Private respondents even by their own admission recognized that the FRP had yet not
been carried out and that the loans of MMIC had not yet been converted into equity.[49]
However, the arbitration Committee not only declared the FRP valid and effective, but
also converted the loans of MMIC into equity raising the equity of DBP to 87%.[50]
The Arbitration Committee ruled that there was a commitment to carry out the FRP[51]
on the ground of promissory estoppel.
Similarly, the principle of promissory estoppel applies in the present case considering as
we observed, the fact that the government (that is Alfredo Velayo) was the FRPs
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the FRP
constituted a way out for MMIC. The Committee believes that although the DBP did not
formally agree (assuming that the board and stockholders approvals were not formal
enough), it is bound nonetheless if only for its conspicuous representations.
Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs equity
(at that time) and as MMICs creditor-the DBP can not validly renege on its commitments
simply because at the same time, it held interest against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being carried out although
apparently, it would supposedly fall short of its targets. Assuming that the FRP would fail
to meet its targets, the DBP-and so this Committee holds-can not, in any event, brook any
denial that it was bound to begin with, and the fact is that adequate or not (the FRP), the
government is still bound by virtue of its acts.
The FRP, of course, did not itself promise a resounding success, although it raised DBPs
equity in MMIC to 87%. It is not excuse, however, for the government to deny its
commitments.[52]
Atty. Sison, however, did not agree and correctly observed that:
But the doctrine of promissory estoppel can hardly find application here. The nearest that
there can be said of any estoppel being present in this case is the fact that the board of
MMIC was, at the time the FRP was adopted, mostly composed of PNB and DBP
representatives. But those representatives, singly or collectively, are not themselves PNB
or DBP. They are individuals with personalities separate and distinct from the banks they
represent. PNB and DBP have different boards with different members who may have
different decisions. It is unfair to impose upon them the decision of the board of another
company and thus pin them down on the equitable principle of estoppel. Estoppel is a
principle based on equity and it is certainly not equitable to apply it in this particular
situation. Otherwise the rights of entirely separate, distinct and autonomous legal entities
like PNB and DBP with thousands of stockholders will be suppressed and rendered

nugatory.[53]
As a rule, a corporation exercises its powers, including the power to enter into contracts,
through its board of directors. While a corporation may appoint agents to enter into a
contract in its behalf, the agent, should not exceed his authority.[54] In the case at bar,
there was no showing that the representatives of PNB and DBP in MMIC even had the
requisite authority to enter into a debt-for-equity swap. And if they had such authority,
there was no showing that the banks, through their board of directors, had ratified the
FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its
credit reputation was not exactly something to be considered sound and wholesome.
Under Article 2217 of the Civil Code, moral damages include besmirched reputation
which a corporation may possibly suffer. A corporation whose overdue and unpaid debts
to the Government alone reached a tremendous amount of P22 Billion Pesos cannot
certainly have a solid business reputation to brag about. As Atty. Sison in his separate
opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral
damages. While the Supreme Court may have awarded moral damages to a corporation
for besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling cannot find
application in this case. It must be pointed out that when the supposed wrongful act of
foreclosure was done, MMICs credit reputation was no longer a desirable one. The
company then was already suffering from serious financial crisis which definitely
projects an image not compatible with good and wholesome reputation. So it could not be
said that there was a reputation besmirches by the act of foreclosure.[55]
The arbiters exceeded their authority in awarding damages to MMIC, which is not
impleaded as a party to the derivative suit.
Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have
been impleaded as a party. It was not joined as a party plaintiff or party defendant at any
stage of the proceedings. As it is, the award of damages to MMIC, which was not a party
before the Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest
while the stockholder filing suit for the corporations behalf is only nominal party. The
corporation should be included as a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold
the control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. x x x.[56]
It is a condition sine qua non that the corporation be impleaded as a party because-

x x x. Not only is the corporation an indispensible party, but it is also the present rule that
it must be served with process. The reason given is that the judgment must be made
binding upon the corporation and in order that the corporation may get the benefit of the
suit and may not bring a subsequent suit against the same defendants for the same cause
of action. In other words the corporations must be joined as party because it is its cause of
action that is being litigated and because judgment must be a res ajudicata against it.[57]
The reasons given for not allowing direct individual suit are:
(1) x x x the universally recognized doctrine that a stockholder in a corporation has no
title legal or equitable to the corporate property; that both of these are in the corporation
itself for the benefit of the stockholders. In other words, to allow shareholders to sue
separately would conflict with the separate corporate entity principle;
(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court
held in the case of Evangelista v. Santos, that the stockholders may not directly claim
those damages for themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something which cannot be
legally done in view of section 16 of the Corporation Law xxx;
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in a ascertaining the effect of partial recovery by an
individual on the damages recoverable by the corporation for the same act.[58]
If at all an award was due MMIC, which it was not, the same should have been given
sans deduction, regardless of whether or not the party liable had equity in the corporation,
in view of the doctrine that a corporation has a personality separate and distinct from its
individual stockholders or members. DBPs alleged equity, even if it were indeed 87%,
did not give it ownership over any corporate property, including the monetary award, its
right over said corporate property being a mere expectancy or inchoate right.[59]Notably,
the stipulation even had the effect of prejudicing the other creditors of MMIC.
The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus
Cabarrus, Sr.
It is perplexing how the Arbitration Committee can in one breath rule that the case before
it is a derivative suit, in which the aggrieved party or the real party in interest is
supposedly the MMIC, and at the same time award moral damages to an individual
stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx.
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant to the
Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that
would supersede it, pursuant to paragraph (9), Compromise and Arbitration Agreement,
as and for moral damages; x x x[60]
The majority decision of the Arbitration Committee sought to justify its award of moral
damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by
the government were assets belonging to Industrial Enterprise Inc. (IEI), of which
Cabarrus is the majority stockholder. It then acknowledge that Cabarrus had already
recovered said assets in the RTC, but that he won no more than actual damages. While the
Committee cannot possibly speak for the RTC, there is no doubt that Jesus S. Cabarrus,
Sr., suffered moral damages on account of that specific foreclosure, damages the
Committee believes and so holds, he Jesus S. Cabarrus, Sr., may be awarded in this
proceeding.[61]
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the
majority stockholder, having been ventilated in a complaint he previously filed with the
RTC, from which he obtained actual damages, he was barred res judicata from filing a
similar case in another court, this time asking for moral damages which he failed to get
from the earlier case.[62] Worse, private respondents violated the rule against non-forum
shopping.
It is a basic postulate that s corporation has a personality separate and distinct from its
stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders.
Hence, if wrong was committed in the foreclosure, it was done against the corporation.
Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim those damages for
himself that would result in the appropriation by, and the distribution to, him part of the
corporations assets before the dissolution of the corporation and the liquidation of its
debts and liabilities. The Arbitration Committee, therefore, passed upon matters not
submitted to it. Moreover, said cause of action had already been decided in a separate
case. It is thus quite patent that the arbitration committee exceeded the authority granted
to it by the parties Compromise and Arbitration Agreement by awarding moral damages
to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of
moral damages to Jesus S. Cabarrus, Sr.:
It is clear and it cannot be disputed therefore that based on these stipulated issues, the
parties themselves have agreed that the basic ingredient of the causes of action in this
case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves

(Cabarrus, et al.) admit that the cause of action pertains only to the corporation (MMIC)
and that they are filing this for and in behalf of MMIC.
Perforce this has to be so because it is the basic rule in Corporation Law that the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that a stockholder is not the
co-owner of corporate property. Since the property or assets foreclosed belongs [sic] to
MMIC, the wrong committed, if any, is done against the corporation. There is therefore
no direct injury or direct violation of the rights of Cabarrus et al. There is no way, legal or
equitable, by which Cabarrus et al. could recover damages in their personal capacities
even assuming or just because the foreclosure is improper or invalid. The Compromise
and Arbitration Agreement itself and the elementary principles of Corporation Law say
so. Therefore, I am constrained to dissent from the award of moral damages to Cabarrus.
[64]
From the foregoing discussions, it is evident that, not only did the arbitration committee
exceed its powers or so imperfectly execute them, but also, its findings and conclusions
are palpably devoid of any factual basis and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for appropriate action. The
pleadings and memoranda filed with this Court, as well as in the Court of Appeals, raised
and extensively discussed the issues on the merits. Such being the case, there is sufficient
basis for us to resolve the controversy between the parties anchored on the records and
the pleadings before us.[65]
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the
Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and
January 19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the
Arbitration Committee is hereby VACATED.
SO ORDERED

EN BANC
G.R. No. L-22973

January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial
Sheriff of Camarines Norte, defendants-appellees.
Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.

Tomas Besa and Jose B. Galang for defendants-appellees.

ANGELES, J.:
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
Philippine National Bank and Anacleto Heraldo, defendants", dismissing the complaint
against both defendants and sentencing the plaintiff to pay to defendant Philippine
National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of
6% per annum from December 22, 1961 until fully paid, and the costs of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in its
brief which may be restated as follows:
1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87
and not P58,213.51 as concluded by the court a quo; hence, the proceeds of the
foreclosure sale of its real property alone in the amount of P56,908.00 on that date, added
to the sum of P738.59 it remitted to the PNB thereafter was more than sufficient to
liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattels
unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the
additional sum of P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only 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 with the provisions of
the Chattel Mortgage Law and the venue agreed upon by the parties in the mortgage
contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value;
and
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 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.
The antecedent facts of the case, as found by the trial court, are as follows:
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga
Branch of defendant PNB and the former offered real estate, machinery, logging and
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
defendant PNB a parcel of land, together with the buildings and improvements 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 the land records
of said province, as well as various sawmill equipment, rolling unit and other fixed assets
of the plaintiff, all situated in its compound in the aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for
which the plaintiff signed a promissory note wherein it promised to pay to the PNB the
said sum in five equal yearly installments at the rate of P6,528.40 beginning July 31,
1957, and every year thereafter, the last of which would be on July 31, 1961.
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 another
promissory note wherein it agreed to pay to the former the said sum in five equal yearly
installments at the rate of P3,679.64 beginning July 31, 1957, and ending on July 31,
1961.
The plaintiff failed to pay the amortization on the amounts released to and received by it.
Repeated demands were made upon the plaintiff to pay its obligation but it failed or
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 1957
or early part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the parcel of land, together with the
improvements existing thereon, covered by Transfer Certificate of Title No. 381 of the
land records of Camarines Norte, and to sell it at public auction in accordance with the
provisions of Act No. 3135, as amended, for the satisfaction of the unpaid obligation of
the plaintiff, which as of September 22, 1961, amounted to P57,646.59, excluding
attorney's fees. In compliance with the request, on October 16, 1961, the Provincial
Sheriff of Camarines Norte issued the corresponding notice of extra-judicial 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 ground floor of the
Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte
requesting him to take possession of the chattels mortgaged to it by the plaintiff and sell
them at public auction also on November 21, 1961, for the satisfaction of the sum of
P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees
equivalent to 10% of the amount due and the costs and expenses of the sale. On the same
day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially
the chattels mortgaged by the latter and that the auction 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 November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of
the chattels mortgaged by the plaintiff and made an inventory thereof in the presence of a
PC Sergeant and a policeman of the municipality of Jose Panganiban. On 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 a.m., at the plaintiff's
compound situated in the municipality of Jose Panganiban, Province of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air 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
mortgages on the grounds that they could not be effected unless a Court's order was
issued against it (plaintiff) for said purpose and that the foreclosure proceedings,
according to the terms of the mortgage contracts, should be made in Manila. In said letter
to the Naga Branch of the PNB, it was intimated that if the public auction sale would be
suspended and the plaintiff would be given an extension of ninety (90) days, its
obligation would be settled satisfactorily because an important negotiation was then
going on for the sale of its "whole interest" for an amount more than sufficient to
liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as 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 time and
place. A copy of said advice was sent to the plaintiff for its information and guidance.
The foreclosure sale of the parcel of land, together with the buildings and improvements
thereon, covered by Transfer Certificate of Title No. 381, was, however, held on
November 21, 1961, and the said property was sold to the PNB for the sum of
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 of sale in
favor of the PNB and a copy thereof was sent to the plaintiff.
In a letter dated December 14, 1961 (but apparently posted several days later), the
plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full
settlement of the balance of the obligation of the plaintiff after the application thereto of
the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel 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 discontinued on the
grounds that the mortgaged indebtedness had been fully paid and that it could not be
legally effected at a place other than the City of Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of
Camarines Norte that it had fully paid its obligation to the PNB, and enclosed therewith a
copy of its letter to the latter dated December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the
plaintiff acknowledging the remittance of P738.59 with the advice, however, that as of
that date the balance of the account of the plaintiff was P9,161.76, to which should be
added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day
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
mortgage, did not include the 10% attorney's fees and expenses of the sale. Accordingly,
the plaintiff was advised that the foreclosure sale scheduled on the 21st of said month
would be stopped if a remittance of P9,161.76, plus interest thereon and guarding fees,
would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00
a.m. and they were awarded to the PNB for the sum of P4,200 and the corresponding bill
of sale was issued in its favor by Deputy Provincial Sheriff Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB 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 Attorney of the
Naga Branch of the PNB to the plaintiff, with the suggestion that it exercise its right of
redemption and that it apply for the condonation of the attorney's fees. The plaintiff did
not follow the advice but on the contrary it made known of its intention to file appropriate
action or actions for the protection of its interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff
in Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief 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 that the purchaser
would take delivery of the things he bought, Salgado was at first reluctant to allow any
piece of property to be taken out of the compound of the 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 money by way of damages.
Apprehensive of the risk that he would take, Salgado immediately sent a wire to the
President of the plaintiff in Manila, asking advice as to what he should do. In the
meantime, Mariano Bundok was able to take out from the plaintiff's compound two
truckloads of equipment.
In the afternoon of the same day, Salgado received a telegram from plaintiff's President
directing him not to deliver the "chattels" without court order, with the information that
the company was then filing an action for damages against the PNB. On the following
day, May 25, 1962, two trucks and men of Mariano Bundok arrived 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 by the plaintiff to
the PNB, which were bought by it at the foreclosure sale and subsequently sold to
Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which, as
stated in the first paragraph of this opinion, sentenced the Mambulao Lumber Company
to pay to the defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6%
per annum from December 22, 1961 (day following the date of the questioned foreclosure
of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber Company

interposed the instant appeal.

We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to the amount
of its indebtedness to the PNB arising out of the principal loans and the 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 of November 21, 1961,
when the sale of real property was effected, and not P58,213.51 as found by the trial
court.
There is merit to this claim. Examining the terms of the promissory note executed by the
appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00
P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit
C-3), and P15,500.00 released on October 19, 1956, as per promissory note of the same
date (Exhibit C-4) was six per cent (6%) per annum from the respective date of said
notes "until paid". In the statement of account of the 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 principal of the loan and the accrued 6%
interest thereon each time the yearly 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 erroneously computed total of P57,646.59, the trial court added 6%
interest per annum from September 23, 1961 to November 21 of the same year. In effect,
the PNB has claimed, and the trial court has adjudicated to it, interest on accrued interests
from the time the various amortizations of the loan became due until the real estate
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 computing the
interest on any obligation, promissory note or other instrument or contract, compound
interest shall not be reckoned, except by agreement, or in default thereof, whenever the
debt is judicially claimed. This is also the clear mandate of Article 2212 of the new Civil
Code which provides that interest due shall earn legal interest only from the time it is
judicially demanded, and of Article 1959 of the same 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 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 fell into error when it awarded interest on accrued
interests, without any agreement to that effect and before they had been judicially
demanded.
Appellant next assails the award of attorney's fees and the expenses of the foreclosure
sale in favor of the PNB. With respect to the amount of P298.54 allowed 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 decries the award of
attorney's fees which, according to the appellant, should not be deducted from the
proceeds of the sale of the real property, not only because there is no express agreement
in the real estate mortgage contract to pay attorney's fees in case the same is extra-

judicially foreclosed, but also for the reason that the PNB neither spent nor incurred any
obligation to pay attorney's fees in connection with the said extra-judicial foreclosure
under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In
this respect, the trial court said:
The parcel of land, together with the buildings and improvements existing thereon
covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was,
however, no evidence how much was the expenses of the foreclosure sale although from
the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for
advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his
commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.
There is really no evidence of record to support the conclusion that the PNB is entitled to
the amount awarded as expenses of the extra-judicial foreclosure sale. The court below
committed error in applying the provisions of the Rules of Court for purposes of arriving
at the amount awarded. It is to be borne in mind that the fees enumerated under
paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a
sheriff serving processes of the court in connection with judicial foreclosure of mortgages
under Rule 68 of the new Rules, and not in cases of extra-judicial foreclosure of
mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which provides
that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of
actual work performed in addition to his expenses in connection with the foreclosure sale.
Admittedly, the PNB failed to prove during the trial of the case, that it actually spent any
amount in connection with the said foreclosure sale. Neither 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 courts should take judicial
notice of the fees provided for by law which need not be proved; but in the absence of
evidence to show at least the number of working days the sheriff concerned actually spent
in connection with the extra-judicial foreclosure sale, the most that he may be entitled to,
would be the amount of P10.00 as a reasonable allowance for two day's work one for
the preparation of the necessary notices of sale, and the other for conducting the auction
sale and issuance of the corresponding certificate of sale in favor of the buyer. Obviously,
therefore, the award of P298.54 as expenses of the sale should be set aside.
But the claim of the appellant that the real estate mortgage does not provide for attorney's
fees in case the same is extra-judicially foreclosed, cannot be favorably considered, as
would readily be revealed by an examination of the pertinent provision of the mortgage
contract. The parties to the mortgage appear to have stipulated under paragraph (c)
thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the
Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as
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

same powers as above specified. In case of judicial foreclosure, the Mortgagor hereby
consents to the appointment of the Mortgagee or any of its employees as receiver, without
any bond, to take charge of the mortgaged property at once, and to hold possession of the
same and the rents, benefits and profits derived from the mortgaged property before the
sale, less the costs and expenses of the receivership; the Mortgagor hereby agrees further
that in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the total
indebtedness then unpaid which in no case shall be less than P100.00 exclusive of all fees
allowed by law, and the expenses of collection shall be the obligation of the Mortgagor
and shall with priority, be paid to the Mortgagee out of any sums realized as rents and
profits derived from the mortgaged property or from the proceeds realized from the sale
of the said property and this mortgage shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of
foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase
"in all cases" appears to be part of the second sentence, a reading of the whole context of
the stipulation would readily show that it logically refers to extra-judicial foreclosure
found in the first sentence and to judicial foreclosure mentioned in the next sentence. And
the ambiguity in the stipulation suggested and pointed out by the appellant by reason of
the faulty sentence construction should not be made to defeat the otherwise clear
intention of the parties in the agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay
attorney's fees were applicable to the extra-judicial foreclosure sale of its real properties,
still, the award of P5,821.35 for attorney's fees has no legal justification, considering the
circumstance that the PNB did not actually spend anything by way of attorney's fees in
connection with the sale. In support of this proposition, appellant 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 claim for such fees should be denied;
2 and (2) that attorney's fees will not be allowed when the attorney conducting the
foreclosure proceedings is an officer of the corporation (mortgagee) who receives a salary
for all the legal services performed by him for the corporation. 3 These authorities are
indeed enlightening; but they should not be applied in this case. The very same authority
first cited suggests that said principle is not absolute, for there is authority to the contrary.
As to the fact that the foreclosure proceeding's were handled by an attorney of the legal
staff of the PNB, we are reluctant to exonerate herein appellant from the payment of the
stipulated attorney's fees on this ground alone, considering the express agreement
between the parties in the mortgage contract under which appellant became liable to pay
the same. At any rate, we find merit in the contention of the appellant that the award of
P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable,
considering that all that the branch attorney of the said bank did in connection with the
foreclosure sale of the real property was to file a petition with the provincial sheriff of
Camarines Norte requesting the latter to sell the same in accordance with the provisions
of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it is found
under the circumstances of the case that the same is unreasonable, is now deeply rooted

in this jurisdiction to entertain any serious objection to it. Thus, this Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved in the
collection of a debt shall be defrayed by the debtor does not imply that such stipulations
must be enforced in accordance with the terms, no matter how injurious or oppressive
they may be. The lawful purpose to be accomplished by such a stipulation is to permit the
creditor to receive the amount due him under his contract without a deduction of the
expenses caused by the delinquency of the debtor. It should not be permitted for him to
convert such a stipulation into a source of speculative profit at the expense of the debtor.
Contracts for attorney's services in this jurisdiction stands upon an entirely different
footing from contracts for the payment of compensation for any other services. By
express provision of section 29 of the Code of Civil Procedure, an attorney is not entitled
in the absence of express contract to recover more than a reasonable compensation for his
services; and even when an express contract is made the court can ignore it and limit the
recovery to reasonable compensation if the amount of the stipulated fee is found by the
court to be unreasonable. This is a very different rule from that announced in section
1091 of the Civil Code with reference to the obligation of contracts in general, where it is
said that such obligation has the force of law between the contracting parties. Had the
plaintiff herein made an express contract to pay his attorney an uncontingent fee of
P2,115.25 for the services to be rendered in reducing the note here in suit to judgment, it
would not have been enforced against him had he seen fit to oppose it, as such a fee is
obviously far greater than is necessary to remunerate the attorney for the work involved
and is therefore unreasonable. In order to enable the court to ignore an express contract
for an attorney's fees, it is not necessary to show, as in other contracts, that it is contrary
to morality or public policy (Art. 1255, Civil Code). It is enough that it is unreasonable or
unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis
whenever the fees stipulated appear excessive, unconscionable, or unreasonable, because
a lawyer is primarily a court officer charged with the duty of assisting the 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 demands that courts
disregard stipulations for counsel fees, whenever they appear to be a source of
speculative profit at the expense of the debtor or mortgagor. 5 And it is not material that
the present action is between the debtor and the creditor, and not between attorney and
client. As court have power to fix the fee as between attorney and client, it must
necessarily have the right to say whether a stipulation like this, inserted in a mortgage
contract, is valid. 6
In determining the compensation of an attorney, the following circumstances should be
considered: the amount and character of the services rendered; the responsibility
imposed; the amount of money or the value of the property affected by the controversy, or
involved in the employment; the skill and experience called for in the performance of the
service; the professional standing of the attorney; the results secured; and whether or not
the fee is contingent or absolute, it being a recognized rule that an attorney may properly

charge a much larger fee when it is to be contingent than when it is not. 7 From the
stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is 10%
of the total indebtedness, irrespective of the manner the foreclosure of the mortgage is to
be effected. The agreement is 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-judicially, and all that the attorney did was to file a petition for
foreclosure with the 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 even with this in mind, we believe the amount of P5,821.35 is far too
excessive a fee for such services. Considering the above circumstances mentioned, it is
our considered opinion that the amount of P1,000.00 would be more than sufficient to
compensate the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real
properties alone together with the amount it remitted to the PNB later was more than
sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in
this claim. From the foregoing discussion of the first two errors assigned, and for
purposes of determining the total obligation of herein appellant to the PNB as of
November 21, 1961 when the real estate mortgage was foreclosed, we have the following
illustration in support of this conclusion:1wph1.t
A. I. 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 8,751.78
(b) Promissory note dated October 19, 1956
P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00
Total obligation as of Nov. 21, 1961
P57,495.86
B. I. Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961
P56,908.00
II. Additional amount remitted to the PNB on Dec. 18, 1961
738.59
Total amount of Payment made to PNB as of Dec. 18, 1961
P57,646.59
Deduct: Total obligation to the PNB
P57,495.86
Excess Payment to the PNB
P 150.73
========
From the foregoing illustration or computation, it is clear that there was no further

necessity to foreclose the mortgage of herein appellant's chattels on December 21, 1961;
and on this ground alone, we may declare the sale of appellant's chattels on the said date,
illegal and void. But we take into consideration the fact that the PNB must have been led
to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real estate
mortgage was legally maintainable, and in accordance with such belief, herein appellee
bank insisted that the proceeds of the sale of appellant's real 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 objectionable on other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after the
foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as
shown not only by its letter to the PNB on November 19, 1961, but also in its letter to the
provincial sheriff of Camarines Norte on the same date. These letters were followed by
another letter to the appellee bank on December 14, 1961, wherein herein appellant, in no
uncertain terms, reiterated its objection to the scheduled sale of its chattels on December
21, 1961 at Jose Panganiban, Camarines Norte for the reasons therein stated that: (1) it
had settled in full its total obligation to the PNB by the sale of the real estate and its
subsequent remittance of the amount of P738.59; and (2) that the contemplated sale at
Jose Panganiban would violate their agreement embodied under paragraph (i) in the
Chattel Mortgage which provides as follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the
parties hereto agree that the corresponding complaint for foreclosure or the petition for
sale should be filed with the courts or the sheriff of the City of Manila, as the case may
be; and that the Mortgagor shall pay attorney's fees hereby fixed at ten per cent (10%) of
the total indebtedness then unpaid but in no case shall it be less than P100.00, exclusive
of all costs and fees allowed by law and of other expenses incurred in connection with the
said foreclosure. [Emphasis supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter
disregard of the objection of herein appellant to the sale of its chattels at Jose Panganiban,
Camarines Norte and not in the City of Manila as agreed upon, the PNB proceeded with
the foreclosure sale of said chattels. The trial court, however, justified said action of the
PNB in the decision appealed from in the following rationale:
While it is true that it was stipulated in the chattel mortgage contract that a petition for the
extra-judicial foreclosure thereof should be filed with the Sheriff of the City of Manila,
nevertheless, the effect thereof was merely to provide another place where 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 repeal a specific provision
of the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the
choice where the foreclosure sale should be held, hence, in the case under consideration,
the PNB had three places from which to select, namely: (1) the place of residence of the
mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the place
stipulated in the contract. The PNB selected the second and, accordingly, the foreclosure
sale held in Jose Panganiban, Camarines Norte, was legal and valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to
the mortgagee to sell the mortgaged property at a public place in the municipality where
the mortgagor resides or where the property is situated, 8 this Court has held 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 to this effect
between the mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed
to have the sale of the mortgaged chattels in the City of Manila, which, any way, is the
residence of the mortgagor, it cannot be rightly said that mortgagee still retained the
power and authority to select from among the places provided for in the law and the place
designated in their agreement over the objection of the mortgagor. In providing that the
mortgaged chattel may be sold at the place of 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 mortgagee as well. Their right arising thereunder,
however, are personal to them; they do not affect either public policy or the rights of third
persons. They may validly be waived. So, when herein mortgagor and mortgagee agreed
in the mortgage contract that in cases of both judicial and extra-judicial foreclosure under
Act 1508, as 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 corresponding rights under the law. The correlative obligation arising from
that agreement have the force of law between them and should be complied with in good
faith. 10
By said agreement the parties waived the legal venue, and such waiver is valid and
legally effective, because it, was merely a personal privilege they waived, which is not
contrary, to public policy or to the prejudice of third persons. It is a general principle that
a person may renounce any right which the law gives unless such renunciation is
expressly prohibited or the right conferred is of such nature that its renunciation would be
against public policy. 11
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 other
than that stipulated for in the mortgage is invalid, unless the mortgagor consents to such
sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale
should make a return of his doings which shall particularly describe the articles sold and
the amount received from each article. From this, it is clear that the law requires that sale
be made article by article, otherwise, it would be impossible for him to state the amount
received for each item. This requirement was totally disregarded by the Deputy Sheriff of
Camarines Norte when he sold the chattels in question in bulk, notwithstanding the fact
that the said chattels consisted of no less than twenty different items as shown in the bill
of sale. 13 This makes the sale of the chattels 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 aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage 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 case where,
as earlier shown, herein appellee bank insisted, and the appellee deputy sheriff of
Camarines Norte proceeded with the sale of the mortgaged chattels at Jose Panganiban,
Camarines Norte, in utter disregard of the valid objection of the mortgagor thereto for the
reason that it is not the place of sale agreed upon in the mortgage contract; and the said
deputy sheriff sold all the chattels (among which were a skagit with caterpillar engine,
three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment consisting of a 150
HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation of the
requirement of the law to sell the same article by article. The PNB has resold the chattels
to another buyer with whom it appears to have actively cooperated in subsequently taking
possession of and removing the chattels from appellant compound by force, as shown by
the circumstance that they had to take along PC soldiers and municipal policemen of Jose
Panganiban who placed the chief security officer of the premises in jail to deprive herein
appellant of its possession thereof. To exonerate itself of any liability for the breach of
peace thus committed, the PNB would want us to believe that it was the subsequent buyer
alone, who is not a party to this case, that was responsible for the forcible taking of the
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. Neither
would its claim that it afterwards gave a chance to herein appellant to repurchase or
redeem the chattels, improve its position, for the mortgagor is not under obligation to take
affirmative steps to repossess the chattels that were converted by the mortgagee. 15 As a
consequence of the said wrongful acts of the PNB and the Deputy Sheriff of Camarines
Norte, therefore, We have to declare that herein appellant is entitled to collect from them,
jointly and severally, the full value of the chattels in question at the time they were
illegally sold by them. To this effect was the holding of this Court in a similar situation.
16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the
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 was
thus subjected. . . .
This brings us to the problem of determining the value of the mortgaged chattels at the
time of their sale in 1961. The trial court did not make any finding on the value of the
chattels in the decision appealed from and denied altogether the right of the appellant to
recover the same. We find enough evidence of record, however, which may be used as a
guide to ascertain their value. The record shows that at the time herein appellant applied
for its loan with the PNB in 1956, for which the chattels in question were mortgaged as
part of the security therefore, herein appellant submitted a list of the chattels together
with its application for the loan with a stated value of P107,115.85. An official of the
PNB made an inspection of the chattels in the same year giving it an appraised value of
P42,850.00 and a market value of P85,700.00. 17 The same chattels with some additional
equipment acquired by herein appellant with part of the proceeds of the loan were

reappraised in a re-inspection conducted by the same official in 1958, in the report of

which he gave all the chattels an appraised value of P26,850.00 and a market value of
P48,200.00. 18 Another re-inspection report in 1959 gave the appraised value as
P19,400.00 and the market value at P25,600.00. 19 The said official of the PNB who
made the foregoing reports of inspection and re-inspections testified in court that in
giving the values appearing in the reports, he used a conservative method of appraisal
which, of course, is to be expected of an official of the appellee bank. And it appears that
the values were considerably reduced in all the re-inspection reports for the reason that
when he went to herein appellant's premises at the time, he found the chattels no longer in
use with 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 did not give them anymore any value in his reports. Noteworthy is the fact,
however, that in the last re-inspection report he made of the chattels in 1961, just a few
months before the foreclosure sale, the same inspector of the PNB reported that the heavy
equipment of herein appellant were "lying idle and rusty" but were "with a shed free from
rains" 20 showing that although they were no longer in use at the time, they were kept in
a proper place and not exposed to the elements. The President of the appellant company,
on the other hand, testified that its caterpillar (tractor) alone is worth P35,000.00 in the
market, and that the value of its two trucks acquired by it with part of the proceeds of the
loan and included as additional items in the mortgaged chattels were worth no less than
P14,000.00. He likewise appraised the worth of its Murphy engine at P16,000.00 which,
according to him, when taken together with the 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 equipments these days which he alleged to have
increased by about five (5) times, could safely be estimated at P120,000.00. This
testimony, except for the appraised and market values appearing in the inspection and reinspection reports of the PNB official earlier mentioned, stand uncontroverted in the
record; but We are not inclined to accept such testimony at its par value, knowing that the
equipments of herein appellant had been idle and unused since it stopped operating its
sawmill in 1958 up 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 evidence aforementioned, We may also safely conclude that the amount of P4,200.00
for which the chattels were sold in the foreclosure sale in question was grossly unfair to
the mortgagor. Considering, however, the facts that the appraised value of P42,850.00
and the market value of P85,700.00 originally given by the PNB official were admittedly
conservative; that two 6 x 6 trucks subsequently bought by the appellant company had
thereafter been added to the chattels; and that the real value thereof, although depreciated
after several years of inoperation, was in a way maintained because the depreciation is
off-set by the marked increase in the cost of heavy equipment in the market, it is our
opinion that the market value of the chattels at the time of the sale should be fixed at the
original appraised value of P42,850.00.
Herein appellant's claim for moral damages, however, seems to have no legal or factual
basis. Obviously, an artificial person like herein appellant corporation cannot experience
physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral
shock or social humiliation which are basis of moral damages. 21 A corporation may have

a good reputation which, if besmirched, may also be a ground for the award of moral
damages. The same cannot be considered under the facts of this case, however, not only
because it is admitted that herein appellant had already ceased in its business operation at
the time of the foreclosure sale of the chattels, but also for the reason that whatever
adverse effects of the foreclosure sale of the chattels could have upon its reputation or
business standing would undoubtedly be the same whether the sale was conducted at Jose
Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties
in the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines
Norte in proceeding with the sale in utter disregard of the agreement to have the chattels
sold in Manila as provided for in the mortgage contract, to which their attentions were
timely called by herein appellant, and in disposing of the chattels in gross for the
miserable amount of P4,200.00, herein appellant should be awarded exemplary damages
in the sum of P10,000.00. The circumstances of the case also warrant the award of
P3,000.00 as attorney's fees for herein appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed
from should be, as hereby, it is set aside. The Philippine National Bank and the Deputy
Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to
Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73
overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the
sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid,
P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees. Costs against both
appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and
Fernando, JJ., concur.
Bengzon, J.P. J., took no part.
Footnotes

FIRST DIVISION
[G.R. No. 113176. July 30, 2001]
HANIL DEVELOPMENT CO., LTD., petitioner, vs. COURT OF APPEALS AND M.R.
ESCOBAR EXPLOSIVE ENGINEERS, INC., respondents.
[G.R. No. 113342. July 30, 2001]
M.R. ESCOBAR EXPLOSIVE ENGINEERS, INC., petitioner vs. COURT OF
APPEALS AND HANIL DEVELOPMENT CO., LTD., respondents.
D E C I S I O N**
PUNO, J.:

Before us are Petitions for Review on Certiorari under Rule 45 of the Decision rendered
on August 23, 1993 and the Resolution promulgated on January 5, 1994, both by the
Court of Appeals.[1]
In the early seventies, the Ministry of Public Works and Highways (MPWH for brevity)
awarded petitioner Hanil Development Co., Ltd. (Hanil for brevity) the contract to
construct the 200-kilometer Iligan-Cagayan de Oro-Butuan Highway Project. On
November 14, 1976, Hanil sub-let the rock-blasting work portion of the contract to
private respondent M.R. Escobar Explosive Engineers, Inc. (Escobar for brevity). By
express stipulation of the parties, Escobar will be compensated thus:
xxxxxxxxx
9. For the services performed by Sub-Contractor (Escobar) in accordance with the terms
and conditions herein described, Hanil will pay twenty pesos (P20.00) per cubic meter on
the following basis:
a. If the rocks are solid in nature, quantity will be assessed as shown on the cross-section.
b. If the nature of the rock is soft and can be removed by using ripper, quantity may be
assessed on the actual blasted amount surveyed by both Company and Sub-Contractors
engineers.[2]
On January 3, 1977, Escobar commenced its blasting works. It continued its services until
terminated by Hanil on December 15, 1978. For the duration of the contract, it worked on
the segments of the construction undertaking designated in the agreement as A-2, B-2, B3, B-4, and C-1. It was fully paid for the areas A-2 and B-4. It claimed, however, that
Hanil still partially owes it one million three hundred forty one thousand seven hundred
twenty-seven and 40/100 (P1,341,727.40) pesos for blastings done in the B-2, B-3 and C1 areas. The claim was predicated on the theory that the rocks it caused to explode in the
contested areas were solid in nature, and therefore the volume should be computed using
the cross-section approach pursuant to the above-quoted paragraph 9(a). It appears that all
the payments it received were fixed based on the joint survey method under paragraph
9(b). Escobar stressed that Hanil was always paid by the MPWH using the cross-section
system. This was pursuant to the awarded 200-km. highway project contract between the
MPWH and Hanil, where the volumes of rocks to be blasted in specific areas were
already pre-estimated based on the cross-section approach. In fine, Escobars line of
reasoning is that Hanil should pay it the same amount of money Hanil received from the
MPWH for the blastings it did in the contested areas (B-2, B-3 and C-1). The figure
P1,341,727.40 represents the difference between the two.
Consequently, Escobar instituted Civil Case No. 35966 for recovery of a sum of money
with damages against Hanil before the then Court of First Instance of Rizal (CFI for
brevity). Hanil filed its answer with counterclaim for damages. Trial thereafter ensued.
On April 16, 1982, the CFI handed down a Decision ordering Hanil to pay P1,341,727.40
for the value of rocks blasted by Escobar; 10% of the amount due for attorneys fees; and

the costs of suit.

On May 24, 1982, upon Escobars motion, the CFI garnished the bank accounts of Hanil
and levied its equipments. On June 29, 1982, it also granted Escobars Ex-parte Motion to
Deposit Cash praying that the Finance Manager of the National Power Corporation
(NAPOCOR) be directed to withdraw Hanils funds from the NAPOCOR and deposit the
same with the Clerk of Court. Hanil challenged the issuance of the May 24 and June 29
Orders before the Court of Appeals in a Petition for Certiorari with prayer for Injunction
and Preliminary Restraining Order, docketed as CA-G.R. No. SP-14512. The appellate
court, in a decision rendered on February 3, 1983, voided the challenged Orders.
While the above-mentioned petition was pending before the Court of Appeals and despite
the writ of injunction issued by it, other developments continued to unfold in the CFI. In
an Order dated August 23, 1982, it disapproved Hanils Amended Record on Appeal and
dismissed its appeal. On October 19, 1982, it denied Hanils Motion for Reconsideration
of the August 23 Order and at the same time granted Escobars Motion for Execution of
Judgment. These two Orders were again contested by Hanil before the appellate court in a
Petition for Certiorari and Mandamus with prayer for Prohibition. The said Orders were
again annulled and set aside. Hanils appeal was reinstated and the CFI was ordered to
elevate the entire records of the case to the Court of Appeals.
After transmittal of the records, the Court of Appeals notified Hanil on February 11, 1985
to file Appellants Brief within forty-five days. On March 13, 1985, and within the
reglementary period to submit its brief, Hanil filed an Application for Judgment against
Attachment Bond and Motion to Defer Filing of Appellants Brief, praying for a hearing
before the Court of Appeals so it could prove the damages it sustained as a result of the
illegal writ of attachment issued by the CFI. It wanted a judgment against the attachment
bond posted by Escobar and its insurer Sanpiro Insurance Corporation (Sanpiro for
brevity) to be included in the appealed decision in the main case, Civil Case No. 35966,
then pending before the Court of Appeals. Escobar filed its Comment with a Motion to
Dismiss Appeal allegedly for Hanils failure to file its brief.
On April 30, 1985, the appellate court issued a Resolution denying Hanils Application for
Judgment Against the Attachment Bond together with its Motion to Defer Filing of
Appellants Brief. It also dismissed Hanils appeal. Hanils Motion for Reconsideration was
denied on June 20, 1985. Hanil promptly sought relief from said April 30 and June 20
Resolutions by filing with this Court a Petition for Certiorari, Mandamus and Prohibition
with Mandatory Injunction. In a decision rendered on September 30, 1986, we reversed
and set aside the assailed Resolutions. We also directed the Court of Appeals to conduct
hearings on the application for damages against the bond filed by Hanil and to reinstate
the appeal.
Upon reinstatement of the appeal, the appellate court conducted hearings on the
application for judgment against the attachment bond. On August 23, 1993, it
promulgated the herein contested Decision,[3] the decretal portion of which reads as
follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. REVERSING and SETTING ASIDE the appealed decision in Civil Case No. 35966;
2. DISMISSING the complaint in Civil Case No. 35966;
3. ORDERING the plaintiff-appellee (Escobar) to pay defendant-appellant under the
counterclaim in Civil Case No. 35966 the following sums of money:
a. FIFTY THOUSAND (P50,000.00) PESOS, for and as attorneys fees;
b. TWENTY THOUSAND (P20,000.00) PESOS in the concept of nominal damages;
4. ORDERING plaintiff-appellee and bondsman Sanpiro to jointly and severally pay
defendant-appellant under the attachment bond the total sum of FIFTY-SEVEN
THOUSAND FIVE HUNDRED SEVEN AND 90/100 (P57,507.90) PESOS as and for
attorneys fees and litigation expenses; and
5. ORDERING plaintiff-appellee to pay bondsman Sanpiro by way of reimbursement
under their Indemnity Agreement the sum of FIFTY-SEVEN THOUSAND FIVE
HUNDRED SEVEN AND 90/100 (P57,507.90) PESOS.
Costs against plaintiff-appellee.[4]
Hanil and Escobar filed their own respective Motions for Reconsideration, which were
both denied in a Resolution[5] dated January 5, 1994.
On February 15, 1994, Hanil filed before this court a Petition for Review on Certiorari
under Rule 45 assailing the amount of damages awarded to it. This was docketed as G.R.
No. 113176, entitled Hanil Development Co., Ltd., Petitioner, vs. Court of Appeals and
M.R. Escobar Explosive Engineers, Respondents. On February 24, 1994, Escobar
likewise filed its own Petition for Review on Certiorari under Rule 45, docketed as G.R.
No. 113342, entitled M.R. Escobar Explosive Engineers, Inc., Petitioner, vs. Court of
Appeals and Hanil Development Co., Ltd., Respondents.
In G.R. No. 113176, petitioner Hanil raises the following grounds:
I. THE U.S.$3,000.00 INCURRED AND SPENT BY PETITIONER IN TAKING THE
DEPOSITION OF ONE OF ITS WITNESSES SHOULD HAVE BEEN ADJUDGED TO
BE PAID BY THE PRIVATE RESPONDENT.
II. THE PETITIONER SHOULD HAVE BEEN AWARDED WITH TEMPERATE
DAMAGES OF P5,000,000.00 IN LIEU OF ACTUAL DAMAGES, INSTEAD OF THE
SMALLER SUM OF P20,000.00 IN NOMINAL DAMAGES.

III. THE PETITIONER SHOULD HAVE BEEN AWARDED MORAL DAMAGES IN

THE AMOUNT OF P1,000,000.00.
IV. THE PRIVATE RESPONDENT SHOULD BE MADE TO PAY THE PETITIONER
EXEMPLARY DAMAGES IN THE AMOUNT OF P5,000,000.00 IN ORDER TO BE
AN EFFECTIVE DETERRENT TO MALEVOLENT, FRAUDULENT AND
MALICIOUS SUIT AND APPLICATION FOR ATTACHMENT AND OTHER
SIMILAR ACTS;
V. THE AWARDED ATTORNEYS FEES FOR THE PRINCIPAL ACTION SHOULD
HAVE BEEN INCREASED FROM P50,000.00 TO P500,000.00.[6]
In G. R. No. 113342, petitioner Escobar makes the following assignment of errors:
I.
THE COURT OF APPEALS ERRED GRAVELY IN NOT AFFIRMING THE TRIAL
COURTS 16 APRIL 1982 DECISION IN PETITIONERS FAVOR.
II.
THE COURT OF APPEALS FURTHER ERRED GRAVELY IN AWARDING
DAMAGES AND ATTORNEYS FEES TO PRIVATE RESPONDENT, AS WELL AS IN
AWARDING ADDITIONAL ATTORNEYS FEES AND INJUNCTION BOND
PREMIUM ON PRIVATE RESPONDENTS APPLICATION FOR DAMAGES ON
ATTACHMENT.
III.
THEREFORE THE COURT OF APPEALS ERRED IN NOT DISMISSING THE
PETITION IN CA-G.R. NO. 05055 OUTRIGHT FOR BEING UTTERLY DEVOID OF
MERIT.[7]
We will jointly discuss the related issues forwarded by the parties, first, in respect of the
appeal from the Decision of the CFI in Civil Case No. 35966, before ruling on the issues
advanced anent the application for judgment on the attachment bond.
Re: Appeal from the Decision of the CFI
in Civil Case No. 35966
In its petition in G.R. No. 113342, Escobar claims that the Court of Appeals erroneously
relied on sub-paragraph (b) of paragraph 9 of the Sub-Contract Agreement. It maintains
that all the blasting works it performed in areas B-2, B-3 and C-1 were for and on solid
rock areas. It emphasizes that since Hanil was paid by the MPWH based on the crosssection system in these areas, it should likewise be paid in the same manner.

The contention fails to impress. Just because the MPWH paid Hanil using the crosssection approach for the blastings in the contested areas does not necessarily mean that
Hanil should in turn compensate Escobar based on the same technique of computation.
Apropos is the observation made by Mr. N.A. Vaitialingam, the Project Manager of the
engineering consultants Sauti, Certeza & F.F. Cruz for the 200-kilometer Iligan-Butuan
highway construction project. In a letter[8] dated December 10, 1979 addressed to the
Honorable Minister of the MPWH, he declared the following:
These payments are made subject to the specification under Clause 105-3-2 Rock
Material of the General Specifications, copy attached. Therefore it is not possible to
ascertain the exact volume of rock or boulders blasted by the sub-contractor from the
volume paid to the contractor because the rock blasted may be, for example, 60% or 65 %
of the volume paid in the cross-section. Also very often boulders are pushed by the bulldozers without blasting.
Thus it is desired that the main contractor (Hanil) and the sub-contractor should come to a
mutual agreement on the subject. (emphasis supplied.)
The import of this observation was correctly interpreted by the Court of Appeals, thus:
What Mr. N.A. Vaitialingam simply means is that the cross-section computation for
payment by the MPWH to appellant (Hanil), as contractor, could not be in turn used as an
accurate basis for payment by appellant to appellee (Escobar), as sub-contractor, not only
because the rock blasted in each cross-section might have been (sic) consisted only of
60% or 65% solid rock but also because very often blasting was no longer necessary
since boulders were just removed by bulldozers. The truth of Mr. Vaitialingams statement
is confirmed by appellees own documentary evidence which show that rock blasting and
boulders comprised a major portion of the work done in segment B-2 (Exh. B-3) and
segment B-3 (Exh. B-2) and that the work in segment C-1 (Exh. B-1) consisted entirely
of blasting and dozing. Moreover, appellees Exhibits B-1, B-2 and B-3 clearly evince that
In all cases there were overburden of earth of varying depths on top of rock and boulders.
In other words, payment to appellee as shown by cross-section under Sub-paragraph (a)
of Paragraph 9 of the questioned document was obviously inapplicable for not being
based on an actual and accurate method of measurement.[9]
This letter (Exhibit H) is part of the evidence of Escobar. It cannot impugn its own
evidence.[10]
To be sure, what governs the contractual relation between Escobar and Hanil are the
stipulations contained in their Sub-contract Agreement. A contract is the law between the
parties and where there is nothing in it which is contrary to law, morals, good customs,
public policy or public good, its validity must be sustained.
The express terms of the agreement are clear as day to necessitate any interpretation. For
the cross-section approach under paragraph 9(a) to apply, it is imperative to establish that
the rocks blasted were solid in nature. Otherwise, the joint survey procedure will be

followed. Escobar failed to prove the nature of the rocks it blasted in the disputed areas. It
did not introduce in evidence object samples of the rocks in the area. Neither did it
present photographs, both wide and close-up angles of representative portions of the said
areas that it worked on, let alone photographs of typical clusters of the rock it blasted.[11]
That the cross-section system was not at all followed by the parties is further shown by
Escobars act in the first seven months of the two-year agreement when it received
monthly payments computed on the basis of the joint survey method. During the period
from January to July 1977, its monthly billings were fixed after a joint survey of the
estimated quantity of rocks before blasting and another joint assessment of the actual
volume of rocks blasted by its own engineers and those of Hanil, which is in accordance
with Paragraph 9(b), not 9(a), of their Sub-contract Agreement. Its belated assertion that
these monthly collections were understood to be mere partial compensation, subject to
adjustment after applying the cross-section approach, appears to be an afterthought. If the
claim is true, it could have easily indicated or annotated the condition in the billings that
it sent Hanil and the receipts for the payment. Since Escobar accepted payment for a
considerable period of time under the joint survey method [par. 9(b)], it cannot later be
allowed to assume an inconsistent position by invoking the cross-section approach [par.
9(a)].
We now discuss the merit of Hanils petition. For its part, it seeks an increase in the grant
of nominal damages and attorneys fees. It also prays for additional awards of moral and
exemplary damages.
Hanils plea for additional amount in the form of temperate damages in lieu of the nominal
damages awarded to it must be denied. We agree with the appellate courts ruling that the
amount of twenty thousand pesos (P20,000.00) is just. Hanil failed to prove the actual
value of pecuniary injury which it sustained as a consequence of Escobars institution of
an unfounded civil suit. The testimony of one of its witnesses presented in the CFI, to the
effect that the filing of the complaint affected Hanils reputation and that it affected the
management and engineers working in the site,[12]1 is not enough proof. The institution
of the suit, unfounded though it may be, does not always lead to pecuniary loss as to
warrant an award of actual or temperate damages. The link between the cause (the suit)
and the effect (the loss) must be established by the required proof.
So, too, must its demand for payment of moral damages fail. The rule is that moral
damages can not be granted in favor of a corporation. Being an artificial person and
having existence only in legal contemplation, a corporation has no feelings, no emotions,
no senses. It cannot, therefore, experience physical suffering, mental anguish, fright,
serious anxiety, wounded feelings or moral shock or social humiliation, which can be
suffered only by one having a nervous system.[13]
Hanils prayer for exemplary damages must likewise be denied. It must be remembered
that this kind of damages cannot be recovered as a matter of right. Its allowance rests in
the sound discretion of the court, and only upon a showing of its legal foundation. Under
the Civil Code, the claimant must first establish that he is entitled to moral, temperate,

compensatory or liquidated damages before it may be imposed in his favor.[14] Hanil

failed to do so, hence, it cannot claim exemplary damages.
We hold, however, that an increase in the grant of attorneys fees from fifty thousand
pesos (P50,000.00) to one hundred fifty thousand pesos (P150,000.00) is in order.
Although the original complaint lodged with the CFI was merely for collection of a sum
of money with damages, involving as it did modest legal issues, that complaint had in
reality generated several incidents during the close to twenty years that this case was
under litigation. Twice, Hanil filed Petitions for Certiorari with the Court of Appeals.
Once, it elevated the case to this Court questioning the dismissal of the appeal by the
appellate court. Then, after reinstatement of the appeal, it had to present and defend its
case not only for the appeal but also for its application on the attachment bond. And now,
Hanil has to contend with Escobars Petition in G.R. No. 113342, even as it concerns itself
with its own Petition in G.R. No. 113176. In fine, taking into account the over-all factual
environment upon which this case proceeded, we find the award of P50,000.00
insufficient and hereby augment it to P150,000.00.
Re: Application for Judgment on the Attachment Bond
Apropos the Application for Judgment on the Attachment Bond, Escobar claims in its
petition that the award of attorneys fees and injunction bond premium in favor of Hanil is
to law and jurisprudence. It contends that no malice or bad faith may be imputed to it in
procuring the writ.
Escobars protestation is now too late in the day. The question of the illegality of the
attachment and Escobars bad faith in obtaining it has long been settled in one of the
earlier incidents of this case. The Court of Appeals, in its decision rendered on February
3, 1983 in C.A.-G.R. No. SP-14512, voided the challenged writ, having been issued with
grave abuse of discretion. Escobars bad faith in procuring the writ cannot be doubted. Its
Petition for the Issuance of Preliminary Attachment made such damning allegations that:
Hanil was already able to secure a complete release of its final collection from the
MPWH; it has moved out some of its heavy equipments for unknown destination, and it
may leave the country anytime. Worse, its Ex Parte Motion to Resolve Petition alleged
that after personal verification by (Escobar) of (Hanils) equipment in Cagayan de Oro
City, it appears that the equipments were no longer existing from their compound. All
these allegations of Escobar were found to be totally baseless and untrue. So manifest
was their baselessness that Escobar did not even submit a reply to refute the assertions
Hanil made in its Opposition to the Petition for the Issuance of Preliminary Attachment.
Nor did it attempt to negate the same assertions of Hanil in its Motion for
Reconsideration. Instead, it advanced the evasive claim that the Motion has become moot
and academic on the ground that the writ of attachment has already been executed.
We therefore hold that on the basis of the evidence presented, Hanil is entitled to
temperate damages in the amount of five hundred thousand pesos (P500,000.00). As a
consequence of the illegal writ, Hanil suffered the following damages: (1) some of the
checks it issued were dishonored after its bank accounts were garnished; (2) its operation

stopped temporarily for five days because it was prevented from using its equipments and
machineries; and (3) its goodwill, reputation and commercial standing as one of the top
multi-national construction firms in Asia was tarnished.
In light of Escobars bad faith in procuring the attachment and garnishment orders, we
grant the additional award of exemplary damages in the amount of one million pesos
(P1,000,000.00) by way of example or correction for public good. This should deter
parties in litigations from resorting to baseless and preposterous allegations to obtain
writs of attachments from gullible judges. The misuse of our legal processes cannot be
tolerated especially if they victimize persons and institutions of foreign nationality doing
legitimate business in our jurisdiction. While as a general rule, the liability on the
attachment bond is limited to actual (or in some cases, temperate or nominal) damages,
exemplary damages may be recovered where the attachment was established to be
maliciously sued out.[15]
We, however, delete the award of attorneys fees for the litigation of the application for
damages against the bond since we have already included the same in our grant of
attorneys fees in the main action concerning the appeal.
In other aspects, we sustain the assailed Decision and Resolution of the Court of Appeals.
The claim of Hanil that as part of the cost of suit, Escobar should be made to pay three
thousand U.S. dollars (U.S.$3,000.00) for the money it spent in taking the deposition
upon written interrogatories of one of its witnesses, Engr. Chan Woo Park, in South
Korea on November 18, 1988 is bereft of merit. The case law on this issue is now settled,
viz.:
(T)he expenses of taking depositions are allowable as costs only if it appears to the court:
(1) that they were reasonably necessary; (2) the burden of so demonstrating is upon the
party claiming such expenses as costs; (3) whether that burden is met is within the sound
discretion of the trial court; and (4) its ruling thereon is presumed to be correct and will
not be disturbed unless it is so unreasonable as to manifest a clear abuse of discretion.[16]
(emphasis supplied)
Whether the taking of a deposition was reasonably necessary to the protection of the
partys interests as to entitle it to reimbursement of expenses is a question primarily for the
lower court to decide based on all the facts and circumstances of the case. On this score,
the Court of Appeals (which heard the Application for Damages) disallowed Hanils claim
since the deposition was merely corroborative in nature and, therefore, superfluous.[17]
We agree. A cursory reading of the transcript of deposition of Engr. Chan will readily
reveal that his testimony only corroborated that of Hanils earlier witness, Mr. Chang
Yong Ahn, its Operations Manager, who took the stand on February 26, 1988. The two
testimonies dealt with the same topic: the illegal writ of attachment on Hanils equipments
and garnishment of its funds, and the pecuniary loss it suffered as a consequence thereof.
In fact, despite the Court of Appealss own conclusion about the superfluity of the
deposition, it still decided in favor of Hanil based on the other undisputed evidence on
record.

In the same vein, we sustain the grant of seven thousand five hundred seven pesos and
ninety centavos (P7,507.90) as injunction bond premium for being reasonable under the
premises.
Finally, we find and so hold that, as between Escobar and its bondsman Sanpiro, the
former is liable to the latter by virtue of their Indemnity Agreement[18]1 for the damages
the subject attachment bond is herein made to answer. However, since the extent of its
liability will be determined only by the terms and conditions of the contract of suretyship,
[19] it can only be held answerable up to the amount of one million three hundred fortyone thousand, seven hundred twenty-seven pesos and forty centavos (P1,341,727.40).
IN VIEW WHEREOF, the assailed Decision and Resolution of the Court of Appeals are
hereby modified as follows:
1. ORDERING Escobar to pay Hanil under the counterclaim in Civil Case No. 35966 the
following sums of money:
a. TWENTY THOUSAND PESOS (P20,000.00) as nominal damages;
b. ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) for and as attorneys
fees.
2. ORDERING Escobar, and bondsman Sanpiro to jointly and severally pay with it up to
the extent of one million three hundred forty-one thousand seven hundred twenty-seven
pesos and forty centavos (P1,341,727.40), to pay Hanil under the attachment bond the
following sums of money:
a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) as temperate damages;
b. ONE MILLION PESOS (P1,000,000.00) as exemplary damages;
c. SEVEN THOUSAND FIVE HUNDRED SEVEN PESOS AND NINETY CENTAVOS
(P7,507.90) for the Injunction Bond Premium.
3. ORDERING Escobar to pay Hanil the remainder of the amount of temperate,
exemplary and bond premium damages - which cannot be fully covered by the
attachment bond - in the sum of ONE HUNDRED SIXTY-FIVE THOUSAND SEVEN
HUNDRED EIGHTY PESOS AND FIFTY CENTAVOS (P165,780.50).
4. ORDERING Escobar to pay bondsman Sanpiro by way of reimbursement under their
Indemnity Agreement the sum of ONE MILLION THREE HUNDRED FORTY-ONE
THOUSAND SEVEN HUNDRED TWENTY-SEVEN PESOS AND FORTY
CENTAVOS (P1,341,727.40).
Costs against Escobar.

SO ORDERED.

G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON.
JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of
Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO
VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE,
JOHN DOE, and JOHN DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin, for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista,
Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents.
DECISION
VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with prayer for a writ
of preliminary mandatory and prohibitory injunction. In their petition Bache & Co.
(Phil.), Inc., a corporation duly organized and existing under the laws of the Philippines,
and its President, Frederick E. Seggerman, pray this Court to declare null and void Search
Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order
respondents to desist from enforcing the same and/or keeping the documents, papers and
effects seized by virtue thereof, as well as from enforcing the tax assessments on
petitioner corporation alleged by petitioners to have been made on the basis of the said
documents, papers and effects, and to order the return of the latter to petitioners. We gave
due course to the petition but did not issue the writ of preliminary injunction prayed for
therein.
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual
1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue,
wrote a letter addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of
a search warrant against petitioners for violation of Section 46(a) of the National Internal
Revenue Code, in relation to all other pertinent provisions thereof, particularly Sections
53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of
herein respondents, to make and file the application for search warrant which was

attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his
witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. They
brought with them the following papers: respondent Veras aforesaid letter-request; an
application for search warrant already filled up but still unsigned by respondent De Leon;
an affidavit of respondent Logronio subscribed before respondent De Leon; a deposition
in printed form of respondent Logronio already accomplished and signed by him but not
yet subscribed; and a search warrant already accomplished but still unsigned by
respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a note, he
instructed his Deputy Clerk of Court to take the depositions of respondents De Leon and
Logronio. After the session had adjourned, respondent Judge was informed that the
depositions had already been taken. The stenographer, upon request of respondent Judge,
read to him her stenographic notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his deposition was found to be false and
without legal basis, he could be charged for perjury. Respondent Judge signed respondent
de Leons application for search warrant and respondent Logronios deposition, Search
Warrant No. 2-M-70 was then sign by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served
the search warrant petitioners at the offices of petitioner corporation on Ayala Avenue,
Makati, Rizal. Petitioners lawyers protested the search on the ground that no formal
complaint or transcript of testimony was attached to the warrant. The agents nevertheless
proceeded with their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal
praying that the search warrant be quashed, dissolved or recalled, that preliminary
prohibitory and mandatory writs of injunction be issued, that the search warrant be
declared null and void, and that the respondents be ordered to pay petitioners, jointly and
severally, damages and attorneys fees. On March 18, 1970, the respondents, thru the
Solicitor General, filed an answer to the petition. After hearing, the court, presided over
by respondent Judge, issued on July 29, 1970, an order dismissing the petition for
dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureau of
Internal Revenue made tax assessments on petitioner corporation in the total sum of
P2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners
came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual 1aw library
1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised Rules
of Court are:jgc:chanrobles.com.ph

"(3) The right of the people to be secure in their persons, houses, papers and effects
against unreasonable searches and seizures shall not be violated, and no warrants shall
issue but upon probable cause, to be determined by the judge after examination under
oath or affirmation of the complainant and the witnesses he may produce, and particularly
describing the place to be searched, and the persons or things to be seized." (Art. III, Sec.
1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. A search warrant shall not issue but
upon probable cause in connection with one specific offense to be determined by the
judge or justice of the peace after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to
be searched and the persons or things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. The judge or justice of the peace must, before
issuing the warrant, personally examine on oath or affirmation the complainant and any
witnesses he may produce and take their depositions in writing, and attach them to the
record, in addition to any affidavits presented to him." (Rule 126, Revised Rules of
Court.)
The examination of the complainant and the witnesses he may produce, required by Art.
III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised
Rules of Court, should be conducted by the judge himself and not by others. The phrase
"which shall be determined by the judge after examination under oath or affirmation of
the complainant and the witnesses he may produce," appearing in the said constitutional
provision, was introduced by Delegate Francisco as an amendment to the draft submitted
by the Sub-Committee of Seven. The following discussion in the Constitutional
Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol. III,
pp. 755-757) is enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compaero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines
de la justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree
Su Seoria que causaria cierta demora el procedimiento apuntado en su enmienda en tal
forma que podria frustrar los fines de la justicia o si Su Seoria encuentra un remedio
para esto casos con el fin de compaginar los fines de la justicia con los derechos del
individuo en su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Seoria
pregunta por la siguiente razon: el que solicita un mandamiento de registro tiene que
hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya el
juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta el registro
puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de
registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y

el juez no se atendra solamente a sea peticion sino que el juez examiner a ese denunciante
y si tiene testigos tambin examiner a los testigos.
"SR. ORENSE. No cree Su Seoria que el tomar le declaracion de ese denunciante por
escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en
todo lo posible las vejaciones injustas con la expedicion arbitraria de los mandamientos
de registro. Creo que entre dos males debemos escoger. el menor.
x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are
incorporating in our constitution something of a fundamental character. Now, before a
judge could issue a search warrant, he must be under the obligation to examine personally
under oath the complainant and if he has any witness, the witnesses that he may produce .
. ."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic
and candid, for it requires the judge, before issuing a search warrant, to "personally
examine on oath or affirmation the complainant and any witnesses he may
produce . . ."cralaw virtua1aw library
Personal examination by the judge of the complainant and his witnesses is necessary to
enable him to determine the existence or non-existence of a probable cause, pursuant to
Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of
Court, both of which prohibit the issuance of warrants except "upon probable cause." The
determination of whether or not a probable cause exists calls for the exercise of judgment
after a judicial appraisal of facts and should not be allowed to be delegated in the absence
of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by respondent Judge of
the complainant (respondent De Leon) and his witness (respondent Logronio). While it is
true that the complainants application for search warrant and the witness printed-form
deposition were subscribed and sworn to before respondent Judge, the latter did not ask
either of the two any question the answer to which could possibly be the basis for
determining whether or not there was probable cause against herein petitioners. Indeed,
the participants seem to have attached so little significance to the matter that notes of the
proceedings before respondent Judge were not even taken. At this juncture it may be well
to recall the salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970,
Annex J-2 of the Petition) taken at the hearing of this case in the court below shows that
per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of
Court, took the depositions of the complainant and his witness, and that stenographic
notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala
hearing a case. After respondent Judge was through with the hearing, Deputy Clerk

Gonzales, stenographer Gaspar, complainant De Leon and witness Logronio went to

respondent Judges chamber and informed the Judge that they had finished the
depositions. Respondent Judge then requested the stenographer to read to him her
stenographic
notes.
Special
Deputy
Clerk
Gonzales
testified
as
follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable Judge requested or
instructed them, requested Mr. Logronio to raise his hand and warned him if his
deposition will be found to be false and without legal basis, he can be charged criminally
for perjury. The Honorable Court told Mr. Logronio whether he affirms the facts
contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
"A The Honorable Judge.
"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings which led to the issuance of
Search Warrant No. 2-M-70 was thus limited to listening to the stenographers readings
of her notes, to a few words of warning against the commission of perjury, and to
administering the oath to the complainant and his witness. This cannot be consider a
personal examination. If there was an examination at all of the complainant and his
witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the
Constitution and the rules require a personal examination by the judge. It was precisely
on account of the intention of the delegates to the Constitutional Convention to make it a
duty of the issuing judge to personally examine the complainant and his witnesses that
the question of how much time would be consumed by the judge in examining them came
up before the Convention, as can be seen from the record of the proceedings quoted
above. The reading of the stenographic notes to respondent Judge did not constitute
sufficient compliance with the constitutional mandate and the rule; for by that manner
respondent Judge did not have the opportunity to observe the demeanor of the
complainant and his witness, and to propound initial and follow-up questions which the
judicial mind, on account of its training, was in the best position to conceive. These were
important in arriving at a sound inference on the all-important question of whether or not
there was probable cause.
2. The search warrant was issued for more than one specific offense.

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National
Internal Revenue Code in relation to all other pertinent provisions thereof particularly
Secs. 53, 72, 73, 208 and 209." The question is: Was the said search warrant issued "in
connection with one specific offense," as required by Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine closely the provisions of the Tax
Code referred to above. Thus we find the following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering
false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to
supply the information required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or
manufactures any article subject to a specific tax, without having paid the privilege tax
therefore, or who aids or abets in the conduct of illicit distilling, rectifying, compounding,
or illicit manufacture of any article subject to specific tax . . .," and provides that in the
case of a corporation, partnership, or association, the official and/or employee who
caused the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value
of output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under the Tax
Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax
returns), which are interrelated. The second is the violation of Sec. 53 (withholding of
income taxes at source). The third is the violation of Sec. 208 (unlawful pursuit of
business or occupation); and the fourth is the violation of Sec. 209 (failure to make a
return of receipts, sales, business or gross value of output actually removed or to pay the
tax due thereon). Even in their classification the six above-mentioned provisions are
embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income
Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and
Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20
SCRA 383), is not applicable, because there the search warrants were issued for
"violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;"
whereas, here Search Warrant No 2-M-70 was issued for violation of only one code, i.e.,
the National Internal Revenue Code. The distinction more apparent than real, because it
was precisely on account of the Stonehill incident, which occurred sometime before the

present Rules of Court took effect on January 1, 1964, that this Court amended the former
rule by inserting therein the phrase "in connection with one specific offense," and adding
the sentence "No search warrant shall issue for more than one specific offense," in what is
now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the disputed
search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the
former Rules of Court that a search warrant shall not issue but upon probable cause in
connection with one specific offense. Not satisfied with this qualification, the Court
added thereto a paragraph, directing that no search warrant shall issue for more than one
specific offense."
3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in Search Warrant
No. 2-M-70 in this manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and
disbursements books, customers ledgers); receipts for payments received; certificates of
stocks and securities; contracts, promissory notes and deeds of sale; telex and coded
messages; business communications, accounting and business records; checks and check
stubs; records of bank deposits and withdrawals; and records of foreign remittances,
covering the years 1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and
of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly
describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion,
said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for the contested search
warrants was compounded by the description therein made of the effects to be searched
for and seized, to wit:chanrob1es virtual 1aw library
Books of accounts, financial records, vouchers, journals, correspondence, receipts,
ledgers, portfolios, credit journals, typewriters, and other documents and/or paper
showing all business transactions including disbursement receipts, balance sheets and
related profit and loss statements.
"Thus, the warrants authorized the search for and seizure of records pertaining to all
business transactions of petitioners herein, regardless of whether the transactions were
legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and
the aforementioned corporations, whatever their nature, thus openly contravening the
explicit command of our Bill of Rights that the things to be seized be particularly
described as well as tending to defeat its major objective: the elimination of general

warrants."cralaw virtua1aw library

While the term "all business transactions" does not appear in Search Warrant No. 2-M-70,
the said warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e.,
the elimination of general warrants, for the language used therein is so all-embracing as
to include all conceivable records of petitioner corporation, which, if seized, could
possibly render its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion
to explain the purpose of the requirement that the warrant should particularly describe the
place to be searched and the things to be seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require
that a search warrant should particularly describe the place to be searched and the things
to be seized. The evident purpose and intent of this requirement is to limit the things to be
seized to those, and only those, particularly described in the search warrant to leave
the officers of the law with no discretion regarding what articles they shall seize, to the
end that unreasonable searches and seizures may not be made, that abuses may not
be committed. That this is the correct interpretation of this constitutional provision is
borne out by American authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated under the search
warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized when the
description therein is as specific as the circumstances will ordinarily allow (People v.
Rubio; 57 Phil. 384); or when the description expresses a conclusion of fact not of law
by which the warrant officer may be guided in making the search and seizure (idem.,
dissent of Abad Santos, J.,); or when the things described are limited to those which bear
direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126,
Revised Rules of Court). The herein search warrant does not conform to any of the
foregoing tests. If the articles desired to be seized have any direct relation to an offense
committed, the applicant must necessarily have some evidence, other than those articles,
to prove the said offense; and the articles subject of search and seizure should come in
handy merely to strengthen such evidence. In this event, the description contained in the
herein disputed warrant should have mentioned, at least, the dates, amounts, persons, and
other pertinent data regarding the receipts of payments, certificates of stocks and
securities, contracts, promissory notes, deeds of sale, messages and communications,
checks, bank deposits and withdrawals, records of foreign remittances, among others,
enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a motion
for reconsideration of respondent Judges order of July 29, 1970. The contention is
without merit. In the first place, when the questions raised before this Court are the same
as those which were squarely raised in and passed upon by the court below, the filing of a
motion for reconsideration in said court before certiorari can be instituted in this Court is

no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second
place, the rule requiring the filing of a motion for reconsideration before an application
for a writ of certiorari can be entertained was never intended to be applied without
considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at
bar time is of the essence in view of the tax assessments sought to be enforced by
respondent officers of the Bureau of Internal Revenue against petitioner corporation, On
account of which immediate and more direct action becomes necessary. (Matute v. Court
of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case,
the deprivation of petitioners fundamental right to due process taints the proceeding
against them in the court below not only with irregularity but also with nullity. (Matute v.
Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection against
unreasonable search and seizures. Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a
corporation which is charged with a violation of a statute of the state of its creation, or of
an act of Congress passed in the exercise of its constitutional powers, cannot refuse to
produce the books and papers of such corporation, we do not wish to be understood as
holding that a corporation is not entitled to immunity, under the 4th Amendment, against
unreasonable searches and seizures. A corporation is, after all, but an association of
individuals under an assumed name and with a distinct legal entity. In organizing itself as
a collective body it waives no constitutional immunities appropriate to such body. Its
property cannot be taken without compensation. It can only be proceeded against by due
process of law, and is protected, under the 14th Amendment, against unlawful
discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a
different rule applied to a corporation, the ground that it was not privileged from
producing its books and papers. But the rights of a corporation against unlawful search
and seizure are to be protected even if the same result might have been achieved in a
lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251
U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of
a corporation to object against unreasonable searches and seizures,
thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action to
assail the legality of the contested warrants and of the seizures made in pursuance thereof,
for the simple reason that said corporations have their respective personalities, separate
and distinct from the personality of herein petitioners, regardless of the amount of shares
of stock or the interest of each of them in said corporations, whatever, the offices they
hold therein may be. Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired thereby, and that the
objection to an unlawful search and seizure is purely personal and cannot be availed of by

third parties. Consequently, petitioners herein may not validly object to the use in
evidence against them of the documents, papers and things seized from the offices and
premises of the corporations adverted to above, since the right to object to the admission
of said papers in evidence belongs exclusively to the corporations, to whom the seized
effects belong, and may not be invoked by the corporate officers in proceedings against
them in their individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices
documents, papers and effects were searched and seized were the petitioners. In the case
at bar, the corporation to whom the seized documents belong, and whose rights have
thereby been impaired, is itself a petitioner. On that score, petitioner corporation here
stands on a different footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely as claimed
by petitioners at least partly as in effect admitted by respondents based on the
documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the
assessments were made some one and one-half months after the search and seizure on
February 25, 1970, is a strong indication that the documents thus seized served as basis
for the assessments. Those assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2M-70 issued by respondent Judge is declared null and void; respondents are permanently
enjoined from enforcing the said search warrant; the documents, papers and effects seized
thereunder are ordered to be returned to petitioners; and respondent officials the Bureau
of Internal Revenue and their representatives are permanently enjoined from enforcing
the assessments mentioned in Annex "G" of the present petition, as well as other
assessments based on the documents, papers and effects seized under the search warrant
herein nullified, and from using the same against petitioners in any criminal or other
proceeding. No pronouncement as to costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ.,
concur.
Reyes, J.B.L., J., concurs with Mr. Justice Barredo.
Castro, J., concurs in the result.
Separate Opinions
BARREDO, J., concurring:chanrob1es virtual 1aw library
I concur.
I agree with the ruling that the search warrants in question violates the specific injunction
of Section 3, Rule 126 that "No search warrant shall issue for more than one specific

offense." There is no question in my mind that, as very clearly pointed out by Mr. Justice
Villamor, the phrase "for violation of Section 46 (a) of the National Internal Revenue
Code in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73,
208 and 209" refers to more than one specific offense, considering that the violation of
Section 53 which refers to withholding of income taxes at the sources, Section 208 which
punishes pursuit of business or occupation without payment of the corresponding specific
or privilege taxes, and Section 209 which penalizes failure to make a return of receipts
sales, business or gross value output actually removed or to pay the taxes thereon in
connection with Title V on Privilege Taxes on Business and Occupation can hardly be
absorbed in a charge of alleged violation of Section 46(a), which merely requires the
filing of income tax returns by corporations, so as to constitute with it a single offense. I
perceive here the danger that the result of the search applied for may be used as basis not
only for a charge of violating Section 46(a) but also and separately of Section 53, 208 and
209. Of course, it is to be admitted that Sections 72 and 73, also mentioned in the
application, are really directly related to Section 46(a) because Section 72 provides for
surcharges for failure to render, returns and for rendering false and fraudulent returns and
Section 73 refers to the penalty for failure to file returns or to pay the corresponding tax.
Taken together, they constitute one single offense penalized under Section 73. I am not
and cannot be in favor of any scheme which amounts to an indirect means of achieving
that which not allowed to be done directly. By merely saying that a party is being charged
with violation of one section of the code in relation to a number of other sections thereof
which in truth have no clear or direct bearing with the first is to me condemnable because
it is no less than a shotgun device which trenches on the basic liberties intended to be
protected by the unequivocal limitations imposed by the Constitution and the Rules of
Court on the privilege to secure a search warrant with the aggravating circumstance of
being coupled with an attempt to mislead the judge before whom the application for its
issuance is presented.
I cannot close this brief concurrence without expressing my vehement disapproval of the
action taken by respondent internal revenue authorities in using the documents and papers
secured during the search, the legality of which was pending resolution by the court, as
basis of an assessment, no matter how highly motivated such action might have been.
This smacks of lack of respect, if not contempt for the court and is certainly intolerable.
At the very least, it appears as an attempt to render the court proceedings moot and
academic, and dealing as this case does with constitutionally protected rights which are
part and parcel of the basic concepts of individual liberty and democracy, the government
agents should have been the first ones to refrain from trying to make a farce of these court
proceedings. Indeed, it is to be regretted that the government agents and the court have
acted irregularly, for it is highly doubtful if it would be consistent with the sacredness of
the rights herein found to have been violated to permit the filing of another application
which complies with the constitutional requirements above discussed and the making of
another search upon the return of the papers and documents now in their illegal
possession. This could be an instance wherein taxes properly due the State will probably
remain unassessed and unpaid only because the ones in charge of the execution of the
laws did not know how to respect basic constitutional rights and liberties.
G.R. No. L-32409 February 27, 1971 - BACHE & CO. (PHIL.), INC., ET AL. v.

VIVENCIO M. RUIZ, ET AL.

G.R. No. L-31061

August 17, 1976

SULO NG BAYAN INC., plaintiff-appellant,

vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL
WATERWORKS & SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and
REGISTER OF DEEDS OF BULACAN, defendants-appellees.
Hill & Associates Law Offices for appellant.
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the
Government Corporate Counsel for appellee National Waterworks & Sewerage Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff corporation (non- stock may
institute an action in behalf of its individual members for the recovery of certain parcels
of land allegedly owned by said members; for the nullification of the transfer certificates
of title issued in favor of defendants appellees covering the aforesaid parcels of land; for
a declaration of "plaintiff's members as absolute owners of the property" and the issuance
of the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de
revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District,
Valenzuela, Bulacan, against defendants-appellees to recover the ownership and
possession of a large tract of land in San Jose del Monte, Bulacan, containing an area of
27,982,250 square meters, more or less, registered under the Torrens System in the name
of defendants-appellees' predecessors-in-interest. 1 The complaint, as amended on June
13, 1966, specifically alleged that plaintiff is a corporation organized and existing under
the laws of the Philippines, with its principal office and place of business at San Jose del
Monte, Bulacan; that its membership is composed of natural persons residing at San Jose

del Monte, Bulacan; that the members of the plaintiff corporation, through themselves
and their predecessors-in-interest, had pioneered in the clearing of the fore-mentioned
tract of land, cultivated the same since the Spanish regime and continuously possessed
the said property openly and public under concept of ownership adverse against the
whole world; that defendant-appellee Gregorio Araneta, Inc., sometime in the year 1958,
through force and intimidation, ejected the members of the plaintiff corporation fro their
possession of the aforementioned vast tract of land; that upon investigation conducted by
the members and officers of plaintiff corporation, they found out for the first time in the
year 1961 that the land in question "had been either fraudelently or erroneously included,
by direct or constructive fraud, in Original Certificate of Title No. 466 of the Land of
Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious,
non-existent and devoid of legal efficacy due to the fact that "no original survey nor plan
whatsoever" appears to have been submitted as a basis thereof and that the Court of First
Instance of Bulacan which issued the decree of registration did not acquire jurisdiction
over the land registration case because no notice of such proceeding was given to the
members of the plaintiff corporation who were then in actual possession of said
properties; that as a consequence of the nullity of the original title, all subsequent titles
derived therefrom, such as Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer
Certificate of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of
Title No. 4988 issued in the name of, the National Waterworks & Sewerage Authority
(NWSA), Transfer Certificate of Title No. 4986 issued in the name of Hacienda Caretas,
Inc., and another transfer certificate of title in the name of Paradise Farms, Inc., are
therefore void. Plaintiff-appellant consequently prayed (1) that Original Certificate of
Title No. 466, as well as all transfer certificates of title issued and derived therefrom, be
nullified; (2) that "plaintiff's members" be declared as absolute owners in common of said
property and that the corresponding certificate of title be issued to plaintiff; and (3) that
defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages
therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to
dismiss the amended complaint on the grounds that (1) the complaint states no cause of
action; and (2) the cause of action, if any, is barred by prescription and laches. Paradise
Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss based on the same
grounds. Appellee National Waterworks & Sewerage Authority did not file any motion to
dismiss. However, it pleaded in its answer as special and affirmative defenses lack of
cause of action by the plaintiff-appellant and the barring of such action by prescription
and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated
October 7, 1966, praying that the case be transferred to another branch of the Court of
First Instance sitting at Malolos, Bulacan, According to defendants-appellees, they were
not furnished a copy of said motion, hence, on October 14, 1966, the lower court issued
an Order requiring plaintiff-appellant to furnish the appellees copy of said motion, hence,
on October 14, 1966, defendant-appellant's motion dated October 7, 1966 and,
consequently, prayed that the said motion be denied for lack of notice and for failure of

the plaintiff-appellant to comply with the Order of October 14, 1966. Similarly,
defendant-appellee paradise Farms, Inc. filed, on December 2, 1966, a manifestation
information the court that it also did not receive a copy of the afore-mentioned of
appellant. On January 24, 1967, the trial court issued an Order dismissing the amended
complaint.
On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on
the grounds that the court had no jurisdiction to issue the Order of dismissal, because its
request for the transfer of the case from the Valenzuela Branch of the Court of First
Instance to the Malolos Branch of the said court has been approved by the Department of
Justice; that the complaint states a sufficient cause of action because the subject matter of
the controversy in one of common interest to the members of the corporation who are so
numerous that the present complaint should be treated as a class suit; and that the action
is not barred by the statute of limitations because (a) an action for the reconveyance of
property registered through fraud does not prescribe, and (b) an action to impugn a void
judgment may be brought any time. This motion was denied by the trial court in its Order
dated February 22, 1967. From the afore-mentioned Order of dismissal and the Order
denying its motion for reconsideration, plaintiff-appellant appealed to the Court of
Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no question of fact was
involved in the appeal but only questions of law and jurisdiction, certified this case to this
Court for resolution of the legal issues involved in the controversy.
I
Appellant contends, as a first assignment of error, that the trial court acted without
authority and jurisdiction in dismissing the amended complaint when the Secretary of
Justice had already approved the transfer of the case to any one of the two branches of the
Court of First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the assignment
of cases in the different branches of the same Court of First Instance. Jurisdiction implies
the power of the court to decide a case, while venue the place of action. There is no
question that respondent court has jurisdiction over the case. The venue of actions in the
Court of First Instance is prescribed in Section 2, Rule 4 of the Revised Rules of Court.
The laying of venue is not left to the caprice of plaintiff, but must be in accordance with
the aforesaid provision of the rules. 2 The mere fact that a request for the transfer of a
case to another branch of the same court has been approved by the Secretary of Justice
does not divest the court originally taking cognizance thereof of its jurisdiction, much
less does it change the venue of the action. As correctly observed by the trial court, the
indorsement of the Undersecretary of Justice did not order the transfer of the case to the
Malolos Branch of the Bulacan Court of First Instance, but only "authorized" it for the
reason given by plaintiff's counsel that the transfer would be convenient for the parties.
The trial court is not without power to either grant or deny the motion, especially in the
light of a strong opposition thereto filed by the defendant. We hold that the court a quo

acted within its authority in denying the motion for the transfer the case to Malolos
notwithstanding the authorization" of the same by the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to dismiss refer to the lack of
personality of plaintiff to file the instant action. Essentially, the term 'cause of action' is
composed of two elements: (1) the right of the plaintiff and (2) the violation of such right
by the defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules require that every
action must be prosecuted and defended in the name of the real party in interest and that
all persons having an interest in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In the amended complaint, the
people whose rights were alleged to have been violated by being deprived and
dispossessed of their land are the members of the corporation and not the corporation
itself. The corporation has a separate. and distinct personality from its members, and this
is not a mere technicality but a matter of substantive law. There is no allegation that the
members have assigned their rights to the corporation or any showing that the corporation
has in any way or manner succeeded to such rights. The corporation evidently did not
have any rights violated by the defendants for which it could seek redress. Even if the
Court should find against the defendants, therefore, the plaintiff corporation would not be
entitled to the reliefs prayed for, which are recoveries of ownership and possession of the
land, issuance of the corresponding title in its name, and payment of damages. Neither
can such reliefs be awarded to the members allegedly deprived of their land, since they
are not parties to the suit. It appearing clearly that the action has not been filed in the
names of the real parties in interest, the complaint must be dismissed on the ground of
lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that the trial court
correctly dismissed the amended complaint.
It is a doctrine well-established and obtains both at law and in equity that a corporation is
a distinct legal entity to be considered as separate and apart from the individual
stockholders or members who compose it, and is not affected by the personal rights,
obligations and transactions of its stockholders or members. 4 The property of the
corporation is its property and not that of the stockholders, as owners, although they have
equities in it. Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from its members. 5 Conversely, a corporation ordinarily has
no interest in the individual property of its stockholders unless transferred to the
corporation, "even in the case of a one-man corporation. 6 The mere fact that one is
president of a corporation does not render the property which he owns or possesses the
property of the corporation, since the president, as individual, and the corporation are
separate similarities. 7 Similarly, stockholders in a corporation engaged in buying and

dealing in real estate whose certificates of stock entitled the holder thereof to an allotment
in the distribution of the land of the corporation upon surrender of their stock certificates
were considered not to have such legal or equitable title or interest in the land, as would
support a suit for title, especially against parties other than the corporation. 8
It must be noted, however, that the juridical personality of the corporation, as separate
and distinct from the persons composing it, is but a legal fiction introduced for the
purpose of convenience and to subserve the ends of justice. 9 This separate personality of
the corporation may be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for fraud or illegality, or to work -an injustice, or
where necessary to achieve equity. 10
Thus, when "the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, ... the law will regard the corporation as an association of
persons, or in the case of two corporations, merge them into one, the one being merely
regarded as part or instrumentality of the other. 11 The same is true where a corporation is
a dummy and serves no business purpose and is intended only as a blind, or an alter ego
or business conduit for the sole benefit of the stockholders. 12 This doctrine of
disregarding the distinct personality of the corporation has been applied by the courts in
those cases when the corporate entity is used for the evasion of taxes 13 or when the veil
of corporate fiction is used to confuse legitimate issue of employer-employee
relationship, 14 or when necessary for the protection of creditors, in which case the veil
of corporate fiction may be pierced and the funds of the corporation may be garnished to
satisfy the debts of a principal stockholder. 15 The aforecited principle is resorted to by
the courts as a measure protection for third parties to prevent fraud, illegality or injustice.
16
It has not been claimed that the members have assigned or transferred whatever rights
they may have on the land in question to the plaintiff corporation. Absent any showing of
interest, therefore, a corporation, like plaintiff-appellant herein, has no personality to
bring an action for and in behalf of its stockholders or members for the purpose of
recovering property which belongs to said stockholders or members in their personal
capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent primary
legal right conferred' by law upon a person. 17 Evidently, there can be no wrong without
a corresponding right, and no breach of duty by one person without a corresponding right
belonging to some other person. 18 Thus, the essential elements of a cause of action are
legal right of the plaintiff, correlative obligation of the defendant, an act or omission of
the defendant in violation of the aforesaid legal right. 19 Clearly, no right of action exists
in favor of plaintiff corporation, for as shown heretofore it does not have any interest in
the subject matter of the case which is material and, direct so as to entitle it to file the suit
as a real party in interest.
III

Appellant maintains, however, that the amended complaint may be treated as a class suit,
pursuant to Section 12 of Rule 3 of the Revised Rules of Court.
In order that a class suit may prosper, the following requisites must be present: (1) that
the subject matter of the controversy is one of common or general interest to many
persons; and (2) that the parties are so numerous that it is impracticable to bring them all
before the court. 20
Under the first requisite, the person who sues must have an interest in the controversy,
common with those for whom he sues, and there must be that unity of interest between
him and all such other persons which would entitle them to maintain the action if suit was
brought by them jointly. 21
As to what constitutes common interest in the subject matter of the controversy, it has
been explained in Scott v. Donald 22 thus:
The interest that will allow parties to join in a bill of complaint, or that will enable the
court to dispense with the presence of all the parties, when numerous, except a
determinate number, is not only an interest in the question, but one in common in the
subject Matter of the suit; ... a community of interest growing out of the nature and
condition of the right in dispute; for, although there may not be any privity between the
numerous parties, there is a common title out of which the question arises, and which lies
at the foundation of the proceedings ... [here] the only matter in common among the
plaintiffs, or between them and the defendants, is an interest in the Question involved
which alone cannot lay a foundation for the joinder of parties. There is scarcely a suit at
law, or in equity which settles a Principle or applies a principle to a given state of facts, or
in which a general statute is interpreted, that does not involved a Question in which other
parties are interested. ... (Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff corporation does not even have an
interest in the subject matter of the controversy, and cannot, therefore, represent its
members or stockholders who claim to own in their individual capacities ownership of
the said property. Moreover, as correctly stated by the appellees, a class suit does not lie
in actions for the recovery of property where several persons claim Partnership of their
respective portions of the property, as each one could alleged and prove his respective
right in a different way for each portion of the land, so that they cannot all be held to have
Identical title through acquisition prescription. 23
Having shown that no cause of action in favor of the plaintiff exists and that the action in
the lower court cannot be considered as a class suit, it would be unnecessary and an Idle
exercise for this Court to resolve the remaining issue of whether or not the plaintiffs
action for reconveyance of real property based upon constructive or implied trust had
already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the
plaintiff-appellant.

Fernando, C.J., Barredo, Aquino and Concepcion, Jr., JJ., concur.

EN BANC
BOY SCOUTS OF THE PHILIPPINES vs
COMMISSION ON AUDIT,
Respondent.
G.R. No. 177131
June 7, 2011
DECISION
LEONARDO-DE CASTRO, J.:
The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the
Philippines (BSP) is the subject matter of this controversy that reached us via petition for
prohibition[1] filed by the BSP under Rule 65 of the 1997 Rules of Court. In this petition,
the BSP seeks that the COA be prohibited from implementing its June 18, 2002 Decision,
[2] its February 21, 2007 Resolution,[3] as well as all other issuances arising therefrom,
and that all of the foregoing be rendered null and void. [4]
Antecedent Facts and Background of the Case
This case arose when the COA issued Resolution No. 99-011[5] on August 19, 1999 (the
COA Resolution), with the subject Defining the Commissions policy with respect to the
audit of the Boy Scouts of the Philippines. In its whereas clauses, the COA Resolution
stated that the BSP was created as a public corporation under Commonwealth Act No.
111, as amended by Presidential Decree No. 460 and Republic Act No. 7278; that in Boy
Scouts of the Philippines v. National Labor Relations Commission,[6] the Supreme Court
ruled that the BSP, as constituted under its charter, was a government-controlled
corporation within the meaning of Article IX(B)(2)(1) of the Constitution; and that the
BSP is appropriately regarded as a government instrumentality under the 1987
Administrative Code.[7] The COA Resolution also cited its constitutional mandate under
Section 2(1), Article IX (D). Finally, the COA Resolution reads:
NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION
PROPER HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual
financial audit of the Boy Scouts of the Philippines in accordance with generally accepted

auditing standards, and express an opinion on whether the financial statements which
include the Balance Sheet, the Income Statement and the Statement of Cash Flows
present fairly its financial position and results of operations.
xxxx
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy
Scouts of the Philippines shall be classified among the government corporations
belonging to the Educational, Social, Scientific, Civic and Research Sector under the
Corporate Audit Office I, to be audited, similar to the subsidiary corporations, by
employing the team audit approach.[8] (Emphases supplied.)
The BSP sought reconsideration of the COA Resolution in a letter[9] dated November 26,
1999 signed by the BSP National President Jejomar C. Binay, who is now the Vice
President of the Republic, wherein he wrote:
It is the position of the BSP, with all due respect, that it is not subject to the Commissions
jurisdiction on the following grounds:
1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs. National
Labor Relations Commission, et al. (G.R. No. 80767) classifying the BSP as a
government-controlled corporation is anchored on the substantial Government
participation in the National Executive Board of the BSP. It is to be noted that the case
was decided when the BSP Charter is defined by Commonwealth Act No. 111 as
amended by Presidential Decree 460.
However, may we humbly refer you to Republic Act No. 7278 which amended the BSPs
charter after the cited case was decided. The most salient of all amendments in RA No.
7278 is the alteration of the composition of the National Executive Board of the BSP.
The said RA virtually eliminated the substantial government participation in the National
Executive Board by removing: (i) the President of the Philippines and executive
secretaries, with the exception of the Secretary of Education, as members thereof; and (ii)
the appointment and confirmation power of the President of the Philippines, as Chief
Scout, over the members of the said Board.
The BSP believes that the cited case has been superseded by RA 7278. Thereby
weakening the cases conclusion that the BSP is a government-controlled corporation
(sic). The 1987 Administrative Code itself, of which the BSP vs. NLRC relied on for
some terms, defines government-owned and controlled corporations as agencies
organized as stock or non-stock corporations which the BSP, under its present charter, is
not.
Also, the Government, like in other GOCCs, does not have funds invested in the BSP.
What RA 7278 only provides is that the Government or any of its subdivisions, branches,

offices, agencies and instrumentalities can from time to time donate and contribute funds
to the BSP.
xxxx
Also the BSP respectfully believes that the BSP is not appropriately regarded as a
government instrumentality under the 1987 Administrative Code as stated in the COA
resolution. As defined by Section 2(10) of the said code, instrumentality refers to any
agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter.
The BSP is not an entity administering special funds. It is not even included in the DECS
National Budget. x x x
It may be argued also that the BSP is not an agency of the Government. The 1987
Administrative Code, merely referred the BSP as an attached agency of the DECS as
distinguished from an actual line agency of departments that are included in the National
Budget. The BSP believes that an attached agency is different from an agency. Agency, as
defined in Section 2(4) of the Administrative Code, is defined as any of the various units
of the Government including a department, bureau, office, instrumentality, governmentowned or controlled corporation or local government or distinct unit therein.
Under the above definition, the BSP is neither a unit of the Government; a department
which refers to an executive department as created by law (Section 2[7] of the
Administrative Code); nor a bureau which refers to any principal subdivision or unit of
any department (Section 2[8], Administrative Code).[10]
Subsequently, requests for reconsideration of the COA Resolution were also made
separately by Robert P. Valdellon, Regional Scout Director, Western Visayas Region,
Iloilo City and Eugenio F. Capreso, Council Scout Executive of Calbayog City.[11]
In a letter[12] dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer
(CAO) I of the COA, furnished the BSP with a copy of the Memorandum[13] dated June
20, 2000 of Atty. Santos M. Alquizalas, the COA General Counsel. In said Memorandum,
the COA General Counsel opined that Republic Act No. 7278 did not supersede the
Courts ruling in Boy Scouts of the Philippines v. National Labor Relations Commission,
even though said law eliminated the substantial government participation in the selection
of members of the National Executive Board of the BSP. The Memorandum further
provides:
Analysis of the said case disclosed that the substantial government participation is only
one (1) of the three (3) grounds relied upon by the Court in the resolution of the case.
Other considerations include the character of the BSPs purposes and functions which has
a public aspect and the statutory designation of the BSP as a public corporation. These

grounds have not been deleted by R.A. No. 7278. On the contrary, these were
strengthened as evidenced by the amendment made relative to BSPs purposes stated in
Section 3 of R.A. No. 7278.
On the argument that BSP is not appropriately regarded as a government instrumentality
and agency of the government, such has already been answered and clarified. The
Supreme Court has elucidated this matter in the BSP case when it declared that BSP is
regarded as, both a government-controlled corporation with an original charter and as an
instrumentality of the Government. Likewise, it is not disputed that the Administrative
Code of 1987 designated the BSP as one of the attached agencies of DECS. Being an
attached agency, however, it does not change its nature as a government-controlled
corporation with original charter and, necessarily, subject to COA audit jurisdiction.
Besides, Section 2(1), Article IX-D of the Constitution provides that COA shall have the
power, authority, and duty to examine, audit and settle all accounts pertaining to the
revenue and receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies or
instrumentalities, including government-owned or controlled corporations with original
charters.[14]
Based on the Memorandum of the COA General Counsel, Director Sunico wrote:
In view of the points clarified by said Memorandum upholding COA Resolution No. 99011, we have to comply with the provisions of the latter, among which is to conduct an
annual financial audit of the Boy Scouts of the Philippines.[15]
In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I,
the COA informed the BSP that a preliminary survey of its organizational structure,
operations and accounting system/records shall be conducted on November 21 to 22,
2000.[16]
Upon the BSPs request, the audit was deferred for thirty (30) days. The BSP then filed a
Petition for Review with Prayer for Preliminary Injunction and/or Temporary Restraining
Order before the COA. This was denied by the COA in its questioned Decision, which
held that the BSP is under its audit jurisdiction. The BSP moved for reconsideration but
this was likewise denied under its questioned Resolution.[17]
This led to the filing by the BSP of this petition for prohibition with preliminary
injunction and temporary restraining order against the COA.
The Issue
As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under
the COAs audit jurisdiction.

The Parties Respective Arguments

The BSP contends that Boy Scouts of the Philippines v. National Labor Relations
Commission is inapplicable for purposes of determining the audit jurisdiction of the COA
as the issue therein was the jurisdiction of the National Labor Relations Commission over
a case for illegal dismissal and unfair labor practice filed by certain BSP employees.[18]
While the BSP concedes that its functions do relate to those that the government might
otherwise completely assume on its own, it avers that this alone was not determinative of
the COAs audit jurisdiction over it. The BSP further avers that the Court in Boy Scouts of
the Philippines v. National Labor Relations Commission simply stated x x x that in
respect of functions, the BSP is akin to a public corporation but this was not synonymous
to holding that the BSP is a government corporation or entity subject to audit by the
COA. [19]
The BSP contends that Republic Act No. 7278 introduced crucial amendments to its
charter; hence, the findings of the Court in Boy Scouts of the Philippines v. National
Labor Relations Commission are no longer valid as the government has ceased to play a
controlling influence in it. The BSP claims that the pronouncements of the Court therein
must be taken only within the context of that case; that the Court had categorically found
that its assets were acquired from the Boy Scouts of America and not from the Philippine
government, and that its operations are financed chiefly from membership dues of the
Boy Scouts themselves as well as from property rentals; and that the BSP may correctly
be characterized as non-governmental, and hence, beyond the audit jurisdiction of the
COA. It further claims that the designation by the Court of the BSP as a government
agency or instrumentality is mere obiter dictum.[20]
The BSP maintains that the provisions of Republic Act No. 7278 suggest that governance
of BSP has come to be overwhelmingly a private affair or nature, with government
participation restricted to the seat of the Secretary of Education, Culture and Sports.[21]
It cites Philippine Airlines Inc. v. Commission on Audit[22] wherein the Court declared
that, PAL, having ceased to be a government-owned or controlled corporation is no
longer under the audit jurisdiction of the COA.[23] Claiming that the amendments
introduced by Republic Act No. 7278 constituted a supervening event that changed the
BSPs corporate identity in the same way that the governments privatization program
changed PALs, the BSP makes the case that the government no longer has control over it;
thus, the COA cannot use the Boy Scouts of the Philippines v. National Labor Relations
Commission as its basis for the exercise of its jurisdiction and the issuance of COA
Resolution No. 99-011.[24] The BSP further claims as follows:
It is not far-fetched, in fact, to concede that BSPs funds and assets are private in
character. Unlike ordinary public corporations, such as provinces, cities, and
municipalities, or government-owned and controlled corporations, such as Land Bank of

the Philippines and the Development Bank of the Philippines, the assets and funds of BSP
are not derived from any government grant. For its operations, BSP is not dependent in
any way on any government appropriation; as a matter of fact, it has not even been
included in any appropriations for the government. To be sure, COA has not alleged, in its
Resolution No. 99-011 or in the Memorandum of its General Counsel, that BSP received,
receives or continues to receive assets and funds from any agency of the government. The
foregoing simply point to the private nature of the funds and assets of petitioner BSP.
xxxx
As stated in petitioners third argument, BSPs assets and funds were never acquired from
the government. Its operations are not in any way financed by the government, as BSP
has never been included in any appropriations act for the government. Neither has the
government invested funds with BSP. BSP, has not been, at any time, a user of
government property or funds; nor have properties of the government been held in trust
by BSP. This is precisely the reason why, until this time, the COA has not attempted to
subject BSP to its audit jurisdiction. x x x.[25]
To summarize its other arguments, the BSP contends that it is not a government-owned or
controlled corporation; neither is it an instrumentality, agency, or subdivision of the
government.
In its Comment,[26] the COA argues as follows:
1.
The BSP is a public corporation created under Commonwealth Act No. 111
dated October 31, 1936, and whose functions relate to the fostering of public virtues of
citizenship and patriotism and the general improvement of the moral spirit and fiber of
the youth. The manner of creation and the purpose for which the BSP was created
indubitably prove that it is a government agency.
2.
Being a government agency, the funds and property owned or held in trust by
the BSP are subject to the audit authority of respondent Commission on Audit pursuant to
Section 2 (1), Article IX-D of the 1987 Constitution.
3.
Republic Act No. 7278 did not change the character of the BSP as a
government-owned or controlled corporation and government instrumentality.[27]
The COA maintains that the functions of the BSP that include, among others, the teaching
to the youth of patriotism, courage, self-reliance, and kindred virtues, are undeniably
sovereign functions enshrined under the Constitution and discussed by the Court in Boy
Scouts of the Philippines v. National Labor Relations Commission. The COA contends
that any attempt to classify the BSP as a private corporation would be incomprehensible
since no less than the law which created it had designated it as a public corporation and
its statutory mandate embraces performance of sovereign functions.[28]

The COA claims that the only reason why the BSP employees fell within the scope of the
Civil Service Commission even before the 1987 Constitution was the fact that it was a
government-owned or controlled corporation; that as an attached agency of the
Department of Education, Culture and Sports (DECS), the BSP is an agency of the
government; and that the BSP is a chartered institution under Section 1(12) of the
Revised Administrative Code of 1987, embraced under the term government
instrumentality.[29]
The COA concludes that being a government agency, the funds and property owned or
held by the BSP are subject to the audit authority of the COA pursuant to Section 2(1),
Article IX (D) of the 1987 Constitution.
In support of its arguments, the COA cites The Veterans Federation of the Philippines
(VFP) v. Reyes,[30] wherein the Court held that among the reasons why the VFP is a
public corporation is that its charter, Republic Act No. 2640, designates it as one.
Furthermore, the COA quotes the Court as saying in that case:
In several cases, we have dealt with the issue of whether certain specific activities can be
classified as sovereign functions. These cases, which deal with activities not immediately
apparent to be sovereign functions, upheld the public sovereign nature of operations
needed either to promote social justice or to stimulate patriotic sentiments and love of
country.
xxxx
Petitioner claims that its funds are not public funds because no budgetary appropriations
or government funds have been released to the VFP directly or indirectly from the DBM,
and because VFP funds come from membership dues and lease rentals earned from
administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove
that it is a private corporation. The DBM indeed did not see it fit to propose budgetary
appropriations to the VFP, having itself believed that the VFP is a private corporation. If
the DBM, however, is mistaken as to its conclusion regarding the nature of VFP's
incorporation, its previous assertions will not prevent future budgetary appropriations to
the VFP. The erroneous application of the law by public officers does not bar a
subsequent correct application of the law.[31] (Citations omitted.)
The COA points out that the government is not precluded by law from extending
financial support to the BSP and adding to its funds, and that as a government
instrumentality which continues to perform a vital function imbued with public interest
and reflective of the governments policy to stimulate patriotic sentiments and love of
country, the BSPs funds from whatever source are public funds, and can be used solely
for public purpose in pursuance of the provisions of Republic Act No. [7278].[32]

The COA claims that the fact that it has not yet audited the BSPs funds may not bar the
subsequent exercise of its audit jurisdiction.
The BSP filed its Reply[33] on August 29, 2007 maintaining that its statutory designation
as a public corporation and the public character of its purpose and functions are not
determinative of the COAs audit jurisdiction; reiterating its stand that Boy Scouts of the
Philippines v. National Labor Relations Commission is not applicable anymore because
the aspect of government ownership and control has been removed by Republic Act No.
7278; and concluding that the funds and property that it either owned or held in trust are
not public funds and are not subject to the COAs audit jurisdiction.
Thereafter, considering the BSPs claim that it is a private corporation, this Court, in a
Resolution[34] dated July 20, 2010, required the parties to file, within a period of twenty
(20) days from receipt of said Resolution, their respective comments on the issue of
whether Commonwealth Act No. 111, as amended by Republic Act No. 7278, is
constitutional.
In compliance with the Courts resolution, the parties filed their respective Comments.
In its Comment[35] dated October 22, 2010, the COA argues that the constitutionality of
Commonwealth Act No. 111, as amended, is not determinative of the resolution of the
present controversy on the COAs audit jurisdiction over petitioner, and in fact, the
controversy may be resolved on other grounds; thus, the requisites before a judicial
inquiry may be made, as set forth in Commissioner of Internal Revenue v. Court of Tax
Appeals,[36] have not been fully met.[37] Moreover, the COA maintains that behind
every law lies the presumption of constitutionality.[38] The COA likewise argues that
contrary to the BSPs position, repeal of a law by implication is not favored.[39] Lastly,
the COA claims that there was no violation of Section 16, Article XII of the 1987
Constitution with the creation or declaration of the BSP as a government corporation.
Citing Philippine Society for the Prevention of Cruelty to Animals v. Commission on
Audit,[40] the COA further alleges:
The true criterion, therefore, to determine whether a corporation is public or private is
found in the totality of the relation of the corporation to the State. If the corporation is
created by the State as the latters own agency or instrumentality to help it in carrying out
its governmental functions, then that corporation is considered public; otherwise, it is
private. x x x.[41]
For its part, in its Comment[42] filed on December 3, 2010, the BSP submits that its
charter, Commonwealth Act No. 111, as amended by Republic Act No. 7278, is
constitutional as it does not violate Section 16, Article XII of the Constitution. The BSP
alleges that while [it] is not a public corporation within the purview of COAs audit
jurisdiction, neither is it a private corporation created by special law falling within the
ambit of the constitutional prohibition x x x.[43] The BSP further alleges:

Petitioners purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1 of

R.A. No. 7278, thus:
xxxx
A reading of the foregoing provision shows that petitioner was created to advance the
interest of the youth, specifically of young boys, and to mold them into becoming good
citizens. Ultimately, the creation of petitioner redounds to the benefit, not only of those
boys, but of the public good or welfare. Hence, it can be said that petitioners purpose and
functions are more of a public rather than a private character. Petitioner caters to all boys
who wish to join the organization without any distinction. It does not limit its
membership to a particular class of boys. Petitioners members are trained in scoutcraft
and taught patriotism, civic consciousness and responsibility, courage, self-reliance,
discipline and kindred virtues, and moral values, preparing them to become model
citizens and outstanding leaders of the country.[44]
The BSP reiterates its stand that the public character of its purpose and functions do not
place it within the ambit of the audit jurisdiction of the COA as it lacks the government
ownership or control that the Constitution requires before an entity may be subject of said
jurisdiction.[45] It avers that it merely stated in its Reply that the withdrawal of
government control is akin to privatization, but it does not necessarily mean that
petitioner is a private corporation.[46] The BSP claims that it has a unique characteristic
which neither classifies it as a purely public nor a purely private corporation;[47] that it is
not a quasi-public corporation; and that it may belong to a different class altogether.[48]
The BSP claims that assuming arguendo that it is a private corporation, its creation is not
contrary to the purpose of Section 16, Article XII of the Constitution; and that the evil
sought to be avoided by said provision is inexistent in the enactment of the BSPs charter,
[49] as, (i) it was not created for any pecuniary purpose; (ii) those who will primarily
benefit from its creation are not its officers but its entire membership consisting of boys
being trained in scoutcraft all over the country; (iii) it caters to all boys who wish to join
the organization without any distinction; and (iv) it does not limit its membership to a
particular class or group of boys. Thus, the enactment of its charter confers no special
privilege to particular individuals, families, or groups; nor does it bring about the danger
of granting undue favors to certain groups to the prejudice of others or of the interest of
the country, which are the evils sought to be prevented by the constitutional provision
involved.[50]
Finally, the BSP states that the presumption of constitutionality of a legislative enactment
prevails absent any clear showing of its repugnancy to the Constitution.[51]
The Ruling of the Court
After looking at the legislative history of its amended charter and carefully studying the
applicable laws and the arguments of both parties, we find that the BSP is a public

corporation and its funds are subject to the COAs audit jurisdiction.
The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled
An Act to Create a Public Corporation to be Known as the Boy Scouts of the Philippines,
and to Define its Powers and Purposes created the BSP as a public corporation to serve
the following public interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves and
others, to train them in scoutcraft, and to inculcate in them patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline and kindred virtues,
and moral values, using the method which are in common use by boy scouts.
Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act
No. 111 and provided substantial changes in the BSP organizational structure. Pertinent
provisions are quoted below:
Section II. Section 5 of the said Act is also amended to read as follows:
The governing body of the said corporation shall consist of a National Executive Board
composed of (a) the President of the Philippines or his representative; (b) the charter and
life members of the Boy Scouts of the Philippines; (c) the Chairman of the Board of
Trustees of the Philippine Scouting Foundation; (d) the Regional Chairman of the Scout
Regions of the Philippines; (e) the Secretary of Education and Culture, the Secretary of
Social Welfare, the Secretary of National Defense, the Secretary of Labor, the Secretary
of Finance, the Secretary of Youth and Sports, and the Secretary of Local Government
and Community Development; (f) an equal number of individuals from the private sector;
(g) the National President of the Girl Scouts of the Philippines; (h) one Scout of Senior
age from each Scout Region to represent the boy membership; and (i) three
representatives of the cultural minorities. Except for the Regional Chairman who shall be
elected by the Regional Scout Councils during their annual meetings, and the Scouts of
their respective regions, all members of the National Executive Board shall be either by
appointment or cooption, subject to ratification and confirmation by the Chief Scout, who
shall be the Head of State. Vacancies in the Executive Board shall be filled by a majority
vote of the remaining members, subject to ratification and confirmation by the Chief
Scout. The by-laws may prescribe the number of members of the National Executive
Board necessary to constitute a quorum of the board, which number may be less than a
majority of the whole number of the board. The National Executive Board shall have
power to make and to amend the by-laws, and, by a two-thirds vote of the whole board at
a meeting called for this purpose, may authorize and cause to be executed mortgages and
liens upon the property of the corporation.
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended
Commonwealth Act No. 111 by strengthening the volunteer and democratic character of

the BSP and reducing government representation in its governing body, as follows:
Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby
amended to read as follows:
"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and be
sued; to enter into contracts; to acquire, own, lease, convey and dispose of such real and
personal estate, land grants, rights and choses in action as shall be necessary for corporate
purposes, and to accept and receive funds, real and personal property by gift, devise,
bequest or other means, to conduct fund-raising activities; to adopt and use a seal, and the
same to alter and destroy; to have offices and conduct its business and affairs in
Metropolitan Manila and in the regions, provinces, cities, municipalities, and barangays
of the Philippines, to make and adopt by-laws, rules and regulations not inconsistent with
this Act and the laws of the Philippines, and generally to do all such acts and things,
including the establishment of regulations for the election of associates and successors, as
may be necessary to carry into effect the provisions of this Act and promote the purposes
of said corporation: Provided, That said corporation shall have no power to issue
certificates of stock or to declare or pay dividends, its objectives and purposes being
solely of benevolent character and not for pecuniary profit of its members.
"Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves and
others, to train them in scoutcraft, and to inculcate in them patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline and kindred virtues,
and moral values, using the method which are in common use by boy scouts."
Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in
lieu thereof, Section 4 shall read as follows:
"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of the
Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby
amended to read as follows:
"Sec. 5. The governing body of the said corporation shall consist of a National Executive
Board, the members of which shall be Filipino citizens of good moral character. The
Board shall be composed of the following:
"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be elected by
the members of the National Council at its meeting called for this purpose;
"(b) The regional chairmen of the scout regions who shall be elected by the
representatives of all the local scout councils of the region during its meeting called for
this purpose: Provided, That a candidate for regional chairman need not be the chairman
of a local scout council;

"(c) The Secretary of Education, Culture and Sports;

"(d) The National President of the Girl Scouts of the Philippines;
"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be elected by
the senior scout delegates of the local scout councils to the scout youth forums in their
respective areas, in its meeting called for this purpose, to represent the boy scout
membership;
"(f) Twelve (12) regular members to be elected by the members of the National Council
in its meeting called for this purpose;
"(g) At least ten (10) but not more than fifteen (15) additional members from the private
sector who shall be elected by the members of the National Executive Board referred to
in the immediately preceding paragraphs (a), (b), (c), (d), (e) and (f) at the organizational
meeting of the newly reconstituted National Executive Board which shall be held
immediately after the meeting of the National Council wherein the twelve (12) regular
members and the one (1) charter member were elected.
xxxx
"Sec. 8. Any donation or contribution which from time to time may be made to the Boy
Scouts of the Philippines by the Government or any of its subdivisions, branches, offices,
agencies or instrumentalities or by a foreign government or by private, entities and
individuals shall be expended by the National Executive Board in pursuance of this Act.
The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code
There are three classes of juridical persons under Article 44 of the Civil Code and the
BSP, as presently constituted under Republic Act No. 7278, falls under the second
classification. Article 44 reads:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose created by
law; their personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which
the law grants a juridical personality, separate and distinct from that of each shareholder,
partner or member. (Emphases supplied.)
The BSP, which is a corporation created for a public interest or purpose, is subject to the
law creating it under Article 45 of the Civil Code, which provides:

Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed
by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the
provisions of this Code concerning partnerships. (Emphasis and underscoring supplied.)
The purpose of the BSP as stated in its amended charter shows that it was created in order
to implement a State policy declared in Article II, Section 13 of the Constitution, which
reads:
ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
Section 13. The State recognizes the vital role of the youth in nation-building and shall
promote and protect their physical, moral, spiritual, intellectual, and social well-being. It
shall inculcate in the youth patriotism and nationalism, and encourage their involvement
in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public purpose in
pursuit of a constitutional mandate, comes within the class of public corporations defined
by paragraph 2, Article 44 of the Civil Code and governed by the law which creates it,
pursuant to Article 45 of the same Code.
The BSPs Classification Under the Administrative Code of 1987
The public, rather than private, character of the BSP is recognized by the fact that, along
with the Girl Scouts of the Philippines, it is classified as an attached agency of the DECS
under Executive Order No. 292, or the Administrative Code of 1987, which states:
TITLE VI EDUCATION, CULTURE AND SPORTS
Chapter 8 Attached Agencies
SEC. 20. Attached Agencies. The following agencies are hereby attached to the
Department:
xxxx
(12) Boy Scouts of the Philippines;
(13) Girl Scouts of the Philippines.
The administrative relationship of an attached agency to the department is defined in the
Administrative Code of 1987 as follows:

BOOK IV
THE EXECUTIVE BRANCH
Chapter 7 ADMINISTRATIVE RELATIONSHIP
SEC. 38. Definition of Administrative Relationship. Unless otherwise expressly stated in
the Code or in other laws defining the special relationships of particular agencies,
administrative relationships shall be categorized and defined as follows:
xxxx
(3) Attachment. (a) This refers to the lateral relationship between the department or its
equivalent and the attached agency or corporation for purposes of policy and program
coordination. The coordination may be accomplished by having the department
represented in the governing board of the attached agency or corporation, either as
chairman or as a member, with or without voting rights, if this is permitted by the charter;
having the attached corporation or agency comply with a system of periodic reporting
which shall reflect the progress of programs and projects; and having the department or
its equivalent provide general policies through its representative in the board, which shall
serve as the framework for the internal policies of the attached corporation or agency.
(Emphasis ours.)
As an attached agency, the BSP enjoys operational autonomy, as long as policy and
program coordination is achieved by having at least one representative of government in
its governing board, which in the case of the BSP is the DECS Secretary. In this sense,
the BSP is not under government control or supervision and control. Still this
characteristic does not make the attached chartered agency a private corporation covered
by the constitutional proscription in question.
Art. XII, Sec. 16 of the Constitution refers to private corporations created by government
for proprietary or economic/business purposes
At the outset, it should be noted that the provision of Section 16 in issue is found in
Article XII of the Constitution, entitled National Economy and Patrimony. Section 1 of
Article XII is quoted as follows:
SECTION 1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and an expanding
productivity as the key to raising the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound

agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both domestic
and foreign markets. However, the State shall protect Filipino enterprises against unfair
foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged to
broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen from
the aforementioned declaration of state policies and goals which pertains to national
economy and patrimony and the interests of the people in economic development.
Section 16, Article XII deals with the formation, organization, or regulation of private
corporations,[52] which should be done through a general law enacted by Congress,
provides for an exception, that is: if the corporation is government owned or controlled;
its creation is in the interest of the common good; and it meets the test of economic
viability. The rationale behind Article XII, Section 16 of the 1987 Constitution was
explained in Feliciano v. Commission on Audit,[53] in the following manner:
The Constitution emphatically prohibits the creation of private corporations except by a
general law applicable to all citizens. The purpose of this constitutional provision is to
ban private corporations created by special charters, which historically gave certain
individuals, families or groups special privileges denied to other citizens.[54] (Emphasis
added.)
It may be gleaned from the above discussion that Article XII, Section 16 bans the creation
of private corporations by special law. The said constitutional provision should not be
construed so as to prohibit the creation of public corporations or a corporate agency or
instrumentality of the government intended to serve a public interest or purpose, which
should not be measured on the basis of economic viability, but according to the public
interest or purpose it serves as envisioned by paragraph (2), of Article 44 of the Civil
Code and the pertinent provisions of the Administrative Code of 1987.
The BSP is a Public Corporation Not Subject to the Test of Government Ownership or
Control and Economic Viability
The BSP is a public corporation or a government agency or instrumentality with juridical
personality, which does not fall within the constitutional prohibition in Article XII,
Section 16, notwithstanding the amendments to its charter. Not all corporations, which
are not government owned or controlled, are ipso facto to be considered private
corporations as there exists another distinct class of corporations or chartered institutions
which are otherwise known as public corporations. These corporations are treated by law
as agencies or instrumentalities of the government which are not subject to the tests of

ownership or control and economic viability but to different criteria relating to their
public purposes/interests or constitutional policies and objectives and their administrative
relationship to the government or any of its Departments or Offices.
Classification of Corporations Under Section 16, Article XII of the Constitution on
National Economy and Patrimony
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases,
insists that the Constitution recognizes only two classes of corporations: private
corporations under a general law, and government-owned or controlled corporations
created by special charters.
We strongly disagree. Section 16, Article XII should not be construed so as to prohibit
Congress from creating public corporations. In fact, Congress has enacted numerous laws
creating public corporations or government agencies or instrumentalities vested with
corporate powers. Moreover, Section 16, Article XII, which relates to National Economy
and Patrimony, could not have tied the hands of Congress in creating public corporations
to serve any of the constitutional policies or objectives.
In his dissent, Justice Carpio contends that this ponente introduces a totally different
species of corporation, which is neither a private corporation nor a government owned or
controlled corporation and, in so doing, is missing the fact that the BSP, which was
created as a non-stock, non-profit corporation, can only be either a private corporation or
a government owned or controlled corporation.
Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the
BSP, under its former charter, was regarded as both a government owned or controlled
corporation with original charter and a public corporation. The said case pertinently
stated:
While the BSP may be seen to be a mixed type of entity, combining aspects of both
public and private entities, we believe that considering the character of its purposes and
its functions, the statutory designation of the BSP as "a public corporation" and the
substantial participation of the Government in the selection of members of the National
Executive Board of the BSP, the BSP, as presently constituted under its charter, is a
government-controlled corporation within the meaning of Article IX (B) (2) (1) of the
Constitution.
We are fortified in this conclusion when we note that the Administrative Code of 1987
designates the BSP as one of the attached agencies of the Department of Education,
Culture and Sports ("DECS"). An "agency of the Government" is defined as referring to
any of the various units of the Government including a department, bureau, office,
instrumentality, government-owned or -controlled corporation, or local government or
distinct unit therein. "Government instrumentality" is in turn defined in the 1987
Administrative Code in the following manner:

Instrumentality - refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned or controlled corporations.
The same Code describes a "chartered institution" in the following terms:
Chartered institution - refers to any agency organized or operating under a special charter,
and vested by law with functions relating to specific constitutional policies or objectives.
This term includes the state universities and colleges, and the monetary authority of the
State.
We believe that the BSP is appropriately regarded as "a government instrumentality"
under the 1987 Administrative Code.
It thus appears that the BSP may be regarded as both a "government controlled
corporation with an original charter" and as an "instrumentality" of the Government
within the meaning of Article IX (B) (2) (1) of the Constitution. x x x.[55] (Emphases
supplied.)
The existence of public or government corporate or juridical entities or chartered
institutions by legislative fiat distinct from private corporations and government owned or
controlled corporation is best exemplified by the 1987 Administrative Code cited above,
which we quote in part:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:
xxxx
(10) "Instrumentality" refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned or controlled corporations.
xxxx
(12) "Chartered institution" refers to any agency organized or operating under a special
charter, and vested by law with functions relating to specific constitutional policies or
objectives. This term includes the state universities and colleges and the monetary
authority of the State.
(13) "Government-owned or controlled corporation" refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) per cent of its capital stock: Provided,
That government-owned or controlled corporations may be further 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 powers, functions and
responsibilities with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled by the
government because of reduction of the number of representatives of the government in
the BSP Board, it does not follow that it also ceases to be a government instrumentality as
it still retains all the characteristics of the latter as an attached agency of the DECS under
the Administrative Code. Vesting corporate powers to an attached agency or
instrumentality of the government is not constitutionally prohibited and is allowed by the
above-mentioned provisions of the Civil Code and the 1987 Administrative Code.
Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations
As presently constituted, the BSP still remains an instrumentality of the national
government. It is a public corporation created by law for a public purpose, attached to the
DECS pursuant to its Charter and the Administrative Code of 1987. It is not a private
corporation which is required to be owned or controlled by the government and be
economically viable to justify its existence under a special law.
The dissent of Justice Carpio also submits that by recognizing a new class of public
corporation(s) created by special charter that will not be subject to the test of economic
viability, the constitutional provision will be circumvented.
However, a review of the Record of the 1986 Constitutional Convention reveals the intent
of the framers of the highest law of our land to distinguish between government
corporations performing governmental functions and corporations involved in business or
proprietary functions:
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. Madam President, I support the proposal to insert ECONOMIC VIABILITY
as one of the grounds for organizing government corporations. x x x.
MR. OPLE. Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If a
government corporation loses, then it makes its claim upon the taxpayers money through
new equity infusions from the government and what is always invoked is the common

good. x x x
Therefore, when we insert the phrase ECONOMIC VIABILITY together with the
common good, this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they become
viable. x x x.
xxxx
THE PRESIDENT. Commissioner Quesada is recognized.
MS. QUESADA. Madam President, may we be clarified by the committee on what is
meant by economic viability?
THE PRESIDENT. Please proceed.
MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that
takes into consideration all benefits, including economic external as well as internal
benefits. These are what they call externalities in economics, so that these are not strictly
financial criteria. Economic viability involves what we call economic returns or benefits
of the country that are not quantifiable in financial terms. x x x.
xxxx
MS. QUESADA. So, would this particular formulation now really limit the entry of
government corporations into activities engaged in by corporations?
MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this
Commission approved that there should be minimum government participation and
intervention in the economy.
MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the
particular requirements when the government would get into corporations. But this time
around, we specifically mentioned economic viability. x x x.
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that
amendment.
MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular
amendment jointly with Commissioner Foz. During the past three decades, there had
been a proliferation of government corporations, very few of which have succeeded, and
many of which are now earmarked by the Presidential Reorganization Commission for
liquidation because they failed the economic test. x x x.
xxxx

MS. QUESADA. But would not the Commissioner say that the reason why many of the
government-owned or controlled corporations failed to come up with the economic test is
due to the management of these corporations, and not the idea itself of government
corporations? It is a problem of efficiency and effectiveness of management of these
corporations which could be remedied, not by eliminating government corporations or the
idea of getting into state-owned corporations, but improving management which our
technocrats should be able to do, given the training and the experience.
MR. OPLE. That is part of the economic viability, Madam President.
MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more
if these government-controlled corporations were given to private hands, and that there
will be more goods and services that will be affordable and within the reach of the
ordinary citizens?
MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation
of a government corporation in accordance with a special charter given by Congress.
However, we are raising the standard a little bit so that, in the future, corporations
established by the government will meet the test of the common good but within that
framework we should also build a certain standard of economic viability.
xxxx
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. This is an inquiry to the committee. With regard to corporations created
by a special charter for government-owned or controlled corporations, will these be in the
pioneer fields or in places where the private enterprise does not or cannot enter? Or is this
so general that these government corporations can compete with private corporations
organized under a general law?
MR. MONSOD. Madam President, x x x. There are two types of government
corporations those that are involved in performing governmental functions, like garbage
disposal, Manila waterworks, and so on; and those government corporations that are
involved in business functions. As we said earlier, there are two criteria that should be
followed for corporations that want to go into business. First is for government
corporations to first prove that they can be efficient in the areas of their proper functions.
This is one of the problems now because they go into all kinds of activities but are not
even efficient in their proper functions. Secondly, they should not go into activities that
the private sector can do better.
MR. PADILLA. There is no question about corporations performing governmental
functions or functions that are impressed with public interest. But the question is with
regard to matters that are covered, perhaps not exhaustively, by private enterprise. It
seems that under this provision the only qualification is economic viability and common
good, but shall government, through government-controlled corporations, compete with

private enterprise?
MR. MONSOD. No, Madam President. As we said, the government should not engage in
activities that private enterprise is engaged in and can do better. x x x.[56] (Emphases
supplied.)
Thus, the test of economic viability clearly does not apply to public corporations dealing
with governmental functions, to which category the BSP belongs. The discussion above
conveys the constitutional intent not to apply this constitutional ban on the creation of
public corporations where the economic viability test would be irrelevant. The said test
would only apply if the corporation is engaged in some economic activity or business
function for the government.
It is undisputed that the BSP performs functions that are impressed with public interest.
In fact, during the consideration of the Senate Bill that eventually became Republic Act
No. 7278, which amended the BSP Charter, one of the bills sponsors, Senator Joey Lina,
described the BSP as follows:
Senator Lina. Yes, I can only think of two organizations involving the masses of our
youth, Mr. President, that should be given this kind of a privilege the Boy Scouts of the
Philippines and the Girl Scouts of the Philippines. Outside of these two groups, I do not
think there are other groups similarly situated.
The Boy Scouts of the Philippines has a long history of providing value formation to our
young, and considering how huge the population of the young people is, at this point in
time, and also considering the importance of having an organization such as this that will
inculcate moral uprightness among the young people, and further considering that the
development of these young people at that tender age of seven to sixteen is vital in the
development of the country producing good citizens, I believe that we can make an
exception of the Boy Scouting movement of the Philippines from this general prohibition
against providing tax exemption and privileges.[57]
Furthermore, this Court cannot agree with the dissenting opinion which equates the
changes introduced by Republic Act No. 7278 to the BSP Charter as clear manifestation
of the intent of Congress to return the BSP to the private sector. It was not the intent of
Congress in enacting Republic Act No. 7278 to give up all interests in this basic youth
organization, which has been its partner in forming responsible citizens for decades.
In fact, as may be seen in the deliberation of the House Bills that eventually resulted to
Republic Act No. 7278, Congress worked closely with the BSP to rejuvenate the
organization, to bring it back to its former glory reached under its original charter,
Commonwealth Act No. 111, and to correct the perceived ills introduced by the
amendments to its Charter under Presidential Decree No. 460. The BSP suffered from
low morale and decrease in number because the Secretaries of the different departments

in government who were too busy to attend the meetings of the BSPs National Executive
Board (the Board) sent representatives who, as it turned out, changed from meeting to
meeting. Thus, the Scouting Councils established in the provinces and cities were not in
touch with what was happening on the national level, but they were left to implement
what was decided by the Board.[58]
A portion of the legislators discussion is quoted below to clearly show their intent:
HON. DEL MAR. x x x I need not mention to you the value and the tremendous good
that the Boy Scout Movement has done not only for the youth in particular but for the
country in general. And that is why, if we look around, our past and present national
leaders, prominent men in the various fields of endeavor, public servants in government
offices, and civic leaders in the communities all over the land, and not only in our country
but all over the world many if not most of them have at one time or another been
beneficiaries of the Scouting Movement. And so, it is along this line, Mr. Chairman, that
we would like to have the early approval of this measure if only to pay back what we owe
much to the Scouting Movement. Now, going to the meat of the matter, Mr. Chairman, if
I may just the Scouting Movement was enacted into law in October 31, 1936 under
Commonwealth Act No. 111. x x x [W]e were acknowledged as the third biggest scouting
organization in the world x x x. And to our mind, Mr. Chairman, this erratic growth and
this decrease in membership [number] is because of the bad policy measures that were
enunciated with the enactment or promulgation by the President before of Presidential
Decree No. 460 which we feel is the culprit of the ills that is flagging the Boy Scout
Movement today. And so, this is specifically what we are attacking, Mr. Chairman, the
disenfranchisement of the National Council in the election of the national board. x x x.
And so, this is what we would like to be appraised of by the officers of the Boy [Scouts]
of the Philippines whom we are also confident, have the best interest of the Boy Scout
Movement at heart and it is in this spirit, Mr. Chairman, that we see no impediment
towards working together, the Boy Scout of the Philippines officers working together
with the House of Representatives in coming out with a measure that will put back the
vigor and enthusiasm of the Boy Scout Movement. x x x.[59] (Emphasis ours.)
The following is another excerpt from the discussion on the House version of the bill, in
the Committee on Government Enterprises:
HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that
have created the Boy Scouts of the Philippines did not provide for any direct government
support by way of appropriation from the national budget to support the activities of this
organization. The point here is, and at the same time they have been subjected to a
governmental intervention, which to their mind has been inimical to the objectives and to
the institution per se, that is why they are seeking legislative fiat to restore back the
original mandate that they had under Commonwealth Act 111. Such having been the
experience in the hands of government, meaning, there has been negative interference on
their part and inasmuch as their mandate is coming from a legislative fiat, then shouldnt it
be, this rhetorical question, shouldnt it be better for this organization to seek a mandate

from, lets say, the government the Corporation Code of the Philippines and register with
the SEC as non-profit non-stock corporation so that government intervention could be
very very minimal. Maybe thats a rhetorical question, they may or they may not answer,
ano. I dont know what would be the benefit of a charter or a mandate being provided for
by way of legislation versus a registration with the SEC under the Corporation Code of
the Philippines inasmuch as they dont get anything from the government anyway insofar
as direct funding. In fact, the only thing that they got from government was intervention
in their affairs. Maybe we can solicit some commentary comments from the resource
persons. Incidentally, dont take that as an objection, Im not objecting. Im all for the
objectives of these two bills. It just occurred to me that since you have had very bad
experience in the hands of government and you will always be open to such possible
intervention even in the future as long as you have a legislative mandate or your mandate
or your charter coming from legislative action.
xxxx
MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the
Philippines will be required to register with the SEC. If we are registered with the SEC,
there could be a danger of proliferation of scout organization. Anybody can organize and
then register with the SEC. If there will be a proliferation of this, then the organization
will lose control of the entire organization. Another disadvantage, Mr. Chairman,
anybody can file a complaint in the SEC against the Boy Scouts of the Philippines and
the SEC may suspend the operation or freeze the assets of the organization and hamper
the operation of the organization. I dont know, Mr. Chairman, how you look at it but there
could be a danger for anybody filing a complaint against the organization in the SEC and
the SEC might suspend the registration permit of the organization and we will not be able
to operate.
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to
corporations registered with the SEC because even if you are government corporation,
court action may be taken against you in other judicial bodies because the SEC is simply
another quasi-judicial body. But, I think, the first point would be very interesting, the first
point that you raised. In effect, what you are saying is that with the legislative mandate
creating your charter, in effect, you have been given some sort of a franchise with this
movement.
MR. ESCUDERO: Yes.
HON. AQUINO: Exclusive franchise of that movement?
MR. ESCUDERO: Yes.
HON. AQUINO: Well, thats very well taken so I will proceed with other issues, Mr.
Chairman. x x x.[60] (Emphases added.)
Therefore, even though the amended BSP charter did away with most of the
governmental presence in the BSP Board, this was done to more strongly promote the
BSPs objectives, which were not supported under Presidential Decree No. 460. The BSP

objectives, as pointed out earlier, are consistent with the public purpose of the promotion
of the well-being of the youth, the future leaders of the country. The amendments were
not done with the view of changing the character of the BSP into a privatized corporation.
The BSP remains an agency attached to a department of the government, the DECS, and
it was not at all stripped of its public character.
The ownership and control test is likewise irrelevant for a public corporation like the
BSP. To reiterate, the relationship of the BSP, an attached agency, to the government,
through the DECS, is defined in the Revised Administrative Code of 1987. The BSP
meets the minimum statutory requirement of an attached government agency as the
DECS Secretary sits at the BSP Board ex officio, thus facilitating the policy and program
coordination between the BSP and the DECS.
Requisites for Declaration of Unconstitutionality Not Met in this Case
The dissenting opinion of Justice Carpio improperly raised the issue of
unconstitutionality of certain provisions of the BSP Charter. Even if the parties were
asked to Comment on the validity of the BSP charter by the Court, this alone does not
comply with the requisites for judicial review, which were clearly set forth in a recent
case:
When questions of constitutional significance are raised, the Court can exercise its power
of judicial review only if the following requisites are present: (1) the existence of an
actual and appropriate case; (2) the existence of personal and substantial interest on the
part of the party raising the constitutional question; (3) recourse to judicial review is
made at the earliest opportunity; and (4) the constitutional question is the lis mota of the
case.[61] (Emphasis added.)
Thus, when it comes to the exercise of the power of judicial review, the constitutional
issue should be the very lis mota, or threshold issue, of the case, and that it should be
raised by either of the parties. These requirements would be ignored under the dissents
rather overreaching view of how this case should have been decided. True, it was the
Court that asked the parties to comment, but the Court cannot be the one to raise a
constitutional issue. Thus, the Court chooses to once more exhibit restraint in the exercise
of its power to pass upon the validity of a law.
Re: the COAs Jurisdiction
Regarding the COAs jurisdiction over the BSP, Section 8 of its amended charter allows
the BSP to receive contributions or donations from the government. Section 8 reads:
Section 8. Any donation or contribution which from time to time may be made to the Boy
Scouts of the Philippines by the Government or any of its subdivisions, branches, offices,
agencies or instrumentalities shall be expended by the Executive Board in pursuance of
this Act.

The sources of funds to maintain the BSP were identified before the House Committee on
Government Enterprises while the bill was being deliberated, and the pertinent portion of
the discussion is quoted below:
MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the
organization. First, Mr. Chairman, the Boy Scouts of the Philippines do not receive
annual allotment from the government. The organization has to raise its own funds
through fund drives and fund campaigns or fund raising activities. Aside from this, we
have some revenue producing projects in the organization that gives us funds to support
the operation. x x x From time to time, Mr. Chairman, when we have special activities we
request for assistance or financial assistance from government agencies, from private
business and corporations, but this is only during special activities that the Boy Scouts of
the Philippines would conduct during the year. Otherwise, we have to raise our own funds
to support the organization.[62]
The nature of the funds of the BSP and the COAs audit jurisdiction were likewise brought
up in said congressional deliberations, to wit:
HON. AQUINO: x x x Insofar as this organization being a government created
organization, in fact, a government corporation classified as such, are your funds or your
finances subjected to the COA audit?
MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We dont fall
under the jurisdiction of the COA.
HON. AQUINO: All right, but before were you?
MR. ESCUDERO: No, Mr. Chairman.
MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by
then Secretary Jorge Vargas and before and up to the middle of the Martial Law years, the
BSP was receiving a subsidy in the form of an annual a one draw from the Sweepstakes.
And, this was the case also with the Girl Scouts at the Anti-TB, but then this was and the
Boy Scouts then because of this funding partly from government was being subjected to
audit in the contributions being made in the part of the Sweepstakes. But this was
removed later during the Martial Law years with the creation of the Human Settlements
Commission. So the situation right now is that the Boy Scouts does not receive any
funding from government, but then in the case of the local councils and this legislative
charter, so to speak, enables the local councils even the national headquarters in view of
the provisions in the existing law to receive donations from the government or any of its
instrumentalities, which would be difficult if the Boy Scouts is registered as a private
corporation with the Securities and Exchange Commission. Government bodies would be
estopped from making donations to the Boy Scouts, which at present is not the case
because there is the Boy Scouts charter, this Commonwealth Act 111 as amended by PD
463.
xxxx
HON. AMATONG: Mr. Chairman, in connection with that.

THE CHAIRMAN: Yeah, Gentleman from Zamboanga.

HON. AMATONG: There is no auditing being made because theres no money put in the
organization, but how about donated funds to this organization? What are the remedies of
the donors of how will they know how their money are being spent?
MR. ESCUDERO: May I answer, Mr. Chairman?
THE CHAIRMAN: Yes, gentleman.
MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the
charter we are required to submit a financial report at the end of each year to the National
Executive Board. So all the funds donated or otherwise is accounted for at the end of the
year by our external auditor. In this case the SGV.[63]
Historically, therefore, the BSP had been subjected to government audit in so far as public
funds had been infused thereto. However, this practice should not preclude the exercise of
the audit jurisdiction of COA, clearly set forth under the Constitution, which pertinently
provides:
Section 2. (1) The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original charters, and on a post-audit
basis: (a) constitutional bodies, commissions and offices that have been granted fiscal
autonomy under this Constitution; (b) autonomous state colleges and universities; (c)
other government-owned or controlled corporations with original charters and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly
or indirectly, from or through the Government, which are required by law of the granting
institution to submit to such audit as a condition of subsidy or equity. x x x. [64]
Since the BSP, under its amended charter, continues to be a public corporation or a
government instrumentality, we come to the inevitable conclusion that it is subject to the
exercise by the COA of its audit jurisdiction in the manner consistent with the provisions
of the BSP Charter.
WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
EN BANC
DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI,
Petitioners,
- versus RICHARD J. GORDON,
Respondent.
PHILIPPINE NATIONAL RED CROSS,
Intervenor.
G. R. No. 175352
Promulgated:
January 18, 2011
x--------------------------------------------------x
RESOLUTION
LEONARDO-DE CASTRO, J.:
This resolves the Motion for Clarification and/or for Reconsideration[1] filed on August
10, 2009 by respondent Richard J. Gordon (respondent) of the Decision promulgated by
this Court on July 15, 2009 (the Decision), the Motion for Partial Reconsideration[2] filed
on August 27, 2009 by movant-intervenor Philippine National Red Cross (PNRC), and
the latters Manifestation and Motion to Admit Attached Position Paper[3] filed on
December 23, 2009.
In the Decision,[4] the Court held that respondent did not forfeit his seat in the Senate
when he accepted the chairmanship of the PNRC Board of Governors, as 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 prohibition in Section 13, Article VI of the
1987 Constitution.[5] The Decision, however, further declared void the PNRC Charter
insofar as it creates the PNRC as a private corporation and consequently ruled that the

PNRC should incorporate under the Corporation Code and register with the Securities
and Exchange Commission if it wants to be a private corporation.[6] The dispositive
portion of the Decision reads as follows:
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red
Cross is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13 of
the Charter of the Philippine National Red Cross, or Republic Act No. 95, as amended by
Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC as a
private corporation or grant it corporate powers.[7]
In his Motion for Clarification and/or for Reconsideration, respondent raises the
following grounds: (1) as the issue of constitutionality of Republic Act (R.A.) No. 95 was
not raised by the parties, the Court went beyond the case in deciding such issue; and (2)
as the Court decided that Petitioners did not have standing to file the instant Petition, the
pronouncement of the Court on the validity of R.A. No. 95 should be considered obiter.
[8]
Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it was
unnecessary for the Court to decide on that question. Respondent cites Laurel v. Garcia,
[9] wherein the Court said that it will not pass upon a constitutional question although
properly presented by the record if the case can be disposed of on some other ground and
goes on to claim that since this Court, in the Decision, disposed of the petition on some
other ground, i.e., lack of standing of petitioners, there was no need for it to delve into the
validity of R.A. No. 95, and the rest of the judgment should be deemed obiter.
In its Motion for Partial Reconsideration, PNRC prays that the Court sustain the
constitutionality of its Charter on the following grounds:
A.
THE ASSAILED DECISION DECLARING UNCONSTITUTIONAL
REPUBLIC ACT NO. 95 AS AMENDED DEPRIVED INTERVENOR PNRC OF ITS
CONSTITUTIONAL RIGHT TO DUE PROCESS.
1.
INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT
CONTROVERSY.
2.
THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS AMENDED WAS
NEVER AN ISSUE IN THIS CASE.
B.
THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE NO. 1264
AND NOT REPUBLIC ACT NO. 95. PRESIDENTIAL DECREE NO. 1264 WAS NOT
A CREATION OF CONGRESS.
C. PNRCS STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN. WHILE
IT IS PERFORMING HUMANITARIAN FUNCTIONS AS AN AUXILIARY TO
GOVERNMENT, IT IS A NEUTRAL ENTITY SEPARATE AND INDEPENDENT OF

GOVERNMENT CONTROL, YET IT DOES NOT QUALIFY AS STRICTLY PRIVATE

IN CHARACTER.
In his Comment and Manifestation[10] filed on November 9, 2009, respondent manifests:
(1) that he agrees with the position taken by the PNRC in its Motion for Partial
Reconsideration dated August 27, 2009; and (2) as of the writing of said Comment and
Manifestation, there was pending before the Congress of the Philippines a proposed bill
entitled An Act Recognizing the PNRC as an Independent, Autonomous, NonGovernmental Organization Auxiliary to the Authorities of the Republic of the
Philippines in the Humanitarian Field, to be Known as The Philippine Red Cross.[11]
After a thorough study of the arguments and points raised by the respondent as well as
those of movant-intervenor in their respective motions, we have reconsidered our
pronouncements in our Decision dated July 15, 2009 with regard to the nature of the
PNRC and the constitutionality of some provisions of the PNRC Charter, R.A. No. 95, as
amended.
As correctly pointed out in respondents Motion, the issue of constitutionality of R.A. No.
95 was not raised by the parties, and was not among the issues defined in the body of the
Decision; thus, it was not the very lis mota of the case. We have reiterated the rule as to
when the Court will consider the issue of constitutionality in Alvarez v. PICOP
Resources, Inc.,[12] thus:
This Court will not touch the issue of unconstitutionality unless it is the very lis mota. It
is a well-established rule that a court should not pass upon a constitutional question and
decide a law to be unconstitutional or invalid, unless such question is raised by the parties
and that when it is raised, if the record also presents some other ground upon which the
court may [rest] its judgment, that course will be adopted and the constitutional question
will be left for consideration until such question will be unavoidable.[13]
Under the rule quoted above, therefore, this Court should not have declared void certain
sections of R.A. No. 95, as amended by Presidential Decree (P.D.) Nos. 1264 and 1643,
the PNRC Charter. Instead, the Court should have exercised judicial restraint on this
matter, especially since there was some other ground upon which the Court could have
based its judgment. Furthermore, the PNRC, the entity most adversely affected by this
declaration of unconstitutionality, which was not even originally a party to this case, was
being compelled, as a consequence of the Decision, to suddenly reorganize and
incorporate under the Corporation Code, after more than sixty (60) years of existence in
this country.
Its existence as a chartered corporation remained unchallenged on ground of
unconstitutionality notwithstanding that R.A. No. 95 was enacted on March 22, 1947
during the effectivity of the 1935 Constitution, which provided for a proscription against
the creation of private corporations by special law, to wit:

SEC. 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned
and controlled by the Government or any subdivision or instrumentality thereof. (Art.
XIV, 1935 Constitution.)
Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and
Article XII, Section 16 of the 1987 Constitution. The latter reads:
SECTION 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
Since its enactment, the PNRC Charter was amended several times, particularly on June
11, 1953, August 16, 1971, December 15, 1977, and October 1, 1979, by virtue of R.A.
No. 855, R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643, respectively. The passage of
several laws relating to the PNRCs corporate existence notwithstanding the effectivity of
the constitutional proscription on the creation of private corporations by law, is a
recognition that the PNRC is not strictly in the nature of a private corporation
contemplated by the aforesaid constitutional ban.
A closer look at the nature of the PNRC would show that there is none like it not just in
terms of structure, but also in terms of history, public service and official status accorded
to it by the State and the international community. There is merit in PNRCs contention
that its structure is sui generis.
The PNRC succeeded the chapter of the American Red Cross which was in existence in
the Philippines since 1917. It was created by an Act of Congress after the Republic of the
Philippines became an independent nation on July 6, 1946 and proclaimed on February
14, 1947 its adherence to the Convention of Geneva of July 29, 1929 for the Amelioration
of the Condition of the Wounded and Sick of Armies in the Field (the Geneva Red Cross
Convention). By that action the Philippines indicated its desire to participate with the
nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose and like other volunteer
organizations established in other countries which have ratified the Geneva Conventions,
to promote the health and welfare of the people in peace and in war.[14]
The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and further
amended by P.D. Nos. 1264 and 1643, show the historical background and legal basis of
the creation of the PNRC by legislative fiat, as a voluntary organization impressed with
public interest. Pertinently R.A. No. 95, as amended by P.D. 1264, provides:
WHEREAS, during the meeting in Geneva, Switzerland, on 22 August 1894, the nations
of the world unanimously agreed to diminish within their power the evils inherent in war;

WHEREAS, more than one hundred forty nations of the world have ratified or adhered to
the Geneva Conventions of August 12, 1949 for the Amelioration of the Condition of the
Wounded and Sick of Armed Forces in the Field and at Sea, The Prisoners of War, and
The Civilian Population in Time of War referred to in this Charter as the Geneva
Conventions;
WHEREAS, the Republic of the Philippines became an independent nation on July 4,
1946, and proclaimed on February 14, 1947 its adherence to the Geneva Conventions of
1929, and by the action, indicated its desire to participate with the 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 Conventions;
WHEREAS, there existed in the Philippines since 1917 a chapter of the American
National Red Cross which was terminated in view of the independence of the Philippines;
and
WHEREAS, the volunteer organizations established in other countries which have
ratified or adhered to the Geneva Conventions assist in promoting the health and welfare
of their people in peace and in war, and through their mutual assistance and cooperation
directly and through their international organizations promote better understanding and
sympathy among the people of the world;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by
virtue of the powers vested in me by the Constitution as Commander-in-Chief of all the
Armed Forces of the Philippines and pursuant to Proclamation No. 1081 dated September
21, 1972, and General Order No. 1 dated September 22, 1972, do hereby decree and order
that Republic Act No. 95, Charter of the Philippine National Red Cross (PNRC) as
amended by Republic Acts No. 855 and 6373, be further amended as follows:
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 Republic of the
Philippines in discharging the obligations set forth in the Geneva Conventions and to
perform such other duties as are inherent upon a national Red Cross Society. The national
headquarters of this Corporation shall be located in Metropolitan Manila. (Emphasis
supplied.)
The significant public service rendered by the PNRC can be gleaned from Section 3 of its
Charter, which provides:
Section 3. That the purposes of this Corporation shall be as follows:
(a) To provide volunteer aid to the sick and wounded of armed forces in time of war, in
accordance with the spirit of and under the conditions prescribed by the Geneva
Conventions to which the Republic of the Philippines proclaimed its adherence;

(b) For the purposes mentioned in the preceding sub-section, to perform all duties
devolving upon the Corporation as a result of the adherence of the Republic of the
Philippines to the said Convention;
(c) To act in matters of voluntary relief and in accordance with the authorities of the
armed forces as a medium of communication between people of the Republic of the
Philippines and their Armed Forces, in time of peace and in time of war, and to act in
such matters between similar national societies of other governments and the
Governments and people and the Armed Forces of the Republic of the Philippines;
(d) To establish and maintain a system of national and international relief in time of peace
and in time of war and apply the same in meeting and emergency needs caused by
typhoons, flood, fires, earthquakes, and other natural disasters and to devise and carry on
measures for minimizing the suffering caused by such disasters;
(e) To devise and promote such other services in time of peace and in time of war as may
be found desirable in improving the health, safety and welfare of the Filipino people;
(f) To devise such means as to make every citizen and/or resident of the Philippines a
member of the Red Cross.
The PNRC is one of the National Red Cross and Red Crescent Societies, which, together
with the International Committee of the Red Cross (ICRC) and the IFRC and RCS, make
up the International Red Cross and Red Crescent Movement (the Movement). They
constitute a worldwide humanitarian movement, whose mission is:
[T]o prevent and alleviate human suffering wherever it may be found, to protect life and
health and ensure respect for the human being, in particular in times of armed conflict
and other emergencies, to work for the prevention of disease and for the promotion of
health and social welfare, to encourage voluntary service and a constant readiness to give
help by the members of the Movement, and a universal sense of solidarity towards all
those in need of its protection and assistance.[15]
The PNRC works closely with the ICRC and has been involved in humanitarian activities
in the Philippines since 1982. Among others, these activities in the country include:
1.
Giving protection and assistance to civilians displaced or otherwise affected by
armed clashes between the government and armed opposition groups, primarily in
Mindanao;
2. Working to minimize the effects of armed hostilities and violence on the population;
3. Visiting detainees; and
4.
Promoting awareness of international humanitarian law in the public and private
sectors.[16]

National Societies such as the PNRC act as auxiliaries to the public authorities of their
own countries in the humanitarian field and provide a range of services including disaster
relief and health and social programmes.
The International Federation of Red Cross (IFRC) and Red Crescent Societies (RCS)
Position Paper,[17] submitted by the PNRC, is instructive with regard to the elements of
the specific nature of the National Societies such as the PNRC, to wit:
National Societies, such as the Philippine National Red Cross and its sister Red Cross and
Red Crescent Societies, have certain specificities deriving from the 1949 Geneva
Convention and the Statutes of the International Red Cross and Red Crescent Movement
(the Movement). They are also guided by the seven Fundamental Principles of the Red
Cross and Red Crescent Movement: Humanity, Impartiality, Neutrality, Independence,
Voluntary Service, Unity and Universality.
A National Society partakes of a sui generis character. It is a protected component of the
Red Cross movement under Articles 24 and 26 of the First Geneva Convention,
especially in times of armed conflict. These provisions require that the staff of a National
Society shall be respected and protected in all circumstances. Such protection is not
ordinarily afforded by an international treaty to ordinary private entities or even nongovernmental organisations (NGOs). This sui generis character is also emphasized by the
Fourth Geneva Convention which holds that an Occupying Power cannot require any
change in the personnel or structure of a National Society. National societies are therefore
organizations that are directly regulated by international humanitarian law, in contrast to
other ordinary private entities, including NGOs.
xxxx
In addition, National Societies are not only officially recognized by their public
authorities as voluntary aid societies, auxiliary to the public authorities in the
humanitarian field, but also benefit from recognition at the International level. This is
considered to be an element distinguishing National Societies from other organisations
(mainly NGOs) and other forms of humanitarian response.
x x x. No other organisation belongs to a world-wide Movement in which all Societies
have equal status and share equal responsibilities and duties in helping each other. This is
considered to be the essence of the Fundamental Principle of Universality.
Furthermore, the National Societies are considered to be auxiliaries to the public
authorities in the humanitarian field. x x x.
The auxiliary status of [a] Red Cross Society means that it is at one and the same time a
private institution and a public service organization because the very nature of its work
implies cooperation with the authorities, a link with the State. In carrying out their major
functions, Red Cross Societies give their humanitarian support to official bodies, in
general having larger resources than the Societies, working towards comparable ends in a

given sector.
x x x No other organization has a duty to be its governments humanitarian partner while
remaining independent.[18] (Emphases ours.)
It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has
remained valid and effective from the time of its enactment in March 22, 1947 under the
1935 Constitution and during the effectivity of the 1973 Constitution and the 1987
Constitution.
The PNRC Charter and its amendatory laws have not been questioned or challenged on
constitutional grounds, not even in this case before the Court now.
In the Decision, the Court, citing Feliciano v. Commission on Audit,[19] explained that
the purpose of the constitutional provision prohibiting Congress from creating private
corporations was to prevent the granting of special privileges to certain individuals,
families, or groups, which were denied to other groups. Based on the above discussion, it
can be seen that the PNRC Charter does not come within the spirit of this constitutional
provision, as it does not grant special privileges to a particular individual, family, or
group, but creates an entity that strives to serve the common good.
Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the 1987
Constitution will hinder the State in adopting measures that will serve the public good or
national interest. It should be noted that a special law, R.A. No. 9520, the Philippine
Cooperative Code of 2008, and not the general corporation code, vests corporate power
and capacities upon cooperatives which are private corporations, in order to implement
the States avowed policy.
In the Decision of July 15, 2009, the Court recognized the public service rendered by the
PNRC as the governments partner in the observance of its international commitments, to
wit:
The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose
mission is to bring timely, effective, and compassionate humanitarian assistance for the
most vulnerable without consideration of nationality, race, religion, gender, social status,
or political affiliation. The PNRC provides six major services: Blood Services, Disaster
Management, Safety Services, Community Health and Nursing, Social Services and
Voluntary Service.
The Republic of the Philippines, adhering to the Geneva Conventions, established the
PNRC as a voluntary organization for the purpose contemplated in the Geneva
Convention of 27 July 1929. x x x.[20] (Citations omitted.)

So must this Court recognize too the countrys adherence to the Geneva Convention and
respect the unique status of the PNRC in consonance with its treaty obligations. The
Geneva Convention has the force and effect of law.[21] Under the Constitution, the
Philippines adopts the generally accepted principles of international law as part of the law
of the land.[22] This constitutional provision must be reconciled and harmonized with
Article XII, Section 16 of the Constitution, instead of using the latter to negate the
former.
By requiring the PNRC to organize under the Corporation Code just like any other
private corporation, the Decision of July 15, 2009 lost sight of the PNRCs special status
under international humanitarian law and as an auxiliary of the State, designated to assist
it in discharging its obligations under the Geneva Conventions. Although the PNRC is
called to be independent under its Fundamental Principles, it interprets such
independence as inclusive of its duty to be the governments humanitarian partner. To be
recognized in the International Committee, the PNRC must have an autonomous status,
and carry out its humanitarian mission in a neutral and impartial manner.
However, in accordance with the Fundamental Principle of Voluntary Service of National
Societies of the Movement, the PNRC must be distinguished from private and profitmaking entities. It is the main characteristic of National Societies that they are not
inspired by the desire for financial gain but by individual commitment and devotion to a
humanitarian purpose freely chosen or accepted as part of the service that National
Societies through its volunteers and/or members render to the Community.[23]
The PNRC, as a National Society of the International Red Cross and Red Crescent
Movement, can neither be classified as an instrumentality of the State, so as not to lose its
character of neutrality as well as its independence, nor strictly as a private corporation
since it is regulated by international humanitarian law and is treated as an auxiliary of the
State.[24]
Based on the above, the sui generis status of the PNRC is now sufficiently established.
Although it is neither a subdivision, agency, or instrumentality of the government, nor a
government-owned or -controlled corporation or a subsidiary thereof, as succinctly
explained in the Decision of July 15, 2009, so much so that respondent, under the
Decision, was correctly allowed to hold his position as Chairman thereof concurrently
while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC
is a private corporation within the contemplation of the provision of the Constitution, that
must be organized under the Corporation Code. As correctly mentioned by Justice
Roberto A. Abad, the sui generis character of PNRC requires us to approach controversies
involving the PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status as an important ally and auxiliary of the
government in the humanitarian field in accordance with its commitments under
international law. This Court cannot all of a sudden refuse to recognize its existence,
especially since the issue of the constitutionality of the PNRC Charter was never raised
by the parties. It bears emphasizing that the PNRC has responded to almost all national

disasters since 1947, and is widely known to provide a substantial portion of the countrys
blood requirements. Its humanitarian work is unparalleled. The Court should not shake its
existence to the core in an untimely and drastic manner that would not only have negative
consequences to those who depend on it in times of disaster and armed hostilities but also
have adverse effects on the image of the Philippines in the international community. The
sections of the PNRC Charter that were declared void must therefore stay.
WHEREFORE, premises considered, respondent Richard J. Gordons Motion for
Clarification and/or for Reconsideration and movant-intervenor PNRCs Motion for
Partial Reconsideration of the Decision in G.R. No. 175352 dated July 15, 2009 are
GRANTED. The constitutionality of R.A. No. 95, as amended, the charter of the
Philippine National Red Cross, was not raised by the parties as an issue and should not
have been passed upon by this Court. The structure of the PNRC is sui generis being
neither strictly private nor public in nature. R.A. No. 95 remains valid and constitutional
in its entirety. The dispositive portion of the Decision should therefore be MODIFIED by
deleting the second sentence, to now read as follows:
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red
Cross is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution.
SO ORDERED.
G.R. No. 136374

February 9, 2000

FRANCISCA S. BALUYOT, petitioner,

vs.
PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS)
represented by its Deputy Ombudsman for the Visayas ARTURO C. MOJICA, Director
VIRGINIA PALANCA-SANTIAGO, and Graft Investigation Officer I ANNA MARIE P.
MILITANTE, respondents.
DE LEON, JR., J.:
Before us is a special civil action for certiorari, seeking the reversal of the Orders dated
August 21, 1998 and October 28, 1998 issued by the Office of the Ombudsman, which
denied petitioner's motion to dismiss and motion for reconsideration,
respectively.1wphi1.nt
The facts are:
During a spot audit conducted on March 21, 1977 by a team of auditors from the
Philippine National Red Cross (PNRC) headquarters, a cash shortage of P154,350.13 was

discovered in the funds of its Bohol chapter. The chapter administrator, petitioner
Francisca S. Baluyot, was held accountable for the shortage. Thereafter, on January 8,
1998, private respondent Paul E. Holganza, in his capacity as a member of the board of
directors of the Bohol chapter, filed an affidavit-complaint1 before the Office of the
Ombudsman charging petitioner of malversation under Article 217 of the Revised Penal
Code. The complaint was docketed as OMB-VIS-CRIM-98-0022. However, upon
recommendation by respondent Anna Marie P. Militante, Graft Investigation Officer I, an
administrative docket for dishonesty was also opened against petitioner; hence, OMBVIS-ADM-98-0063.2
On February 6, 1998, public respondent issued an Order3 requiring petitioner to file her
counter-affidavit to the charges of malversation and dishonesty within ten days from
notice, with a warning that her failure to comply would be construed as a waiver on her
part to refute the charges, and that the case would be resolved based on the evidence on
record. On March 14, 1998, petitioner filed her counter-affidavit,4 raising principally the
defense that public respondent had no jurisdiction over the controversy. She argued that
the Ombudsman had authority only over government-owned or controlled corporations,
which the PNRC was not, or so she claimed.
On August 21, 1998, public respondent issued the first assailed Order5 denying
petitioner's motion to dismiss. It further scheduled a clarificatory hearing on the criminal
aspect of the complaint and a preliminary conference on its administrative aspect on
September 2, 1998. Petitioner received the order on August 26, 1998 and she filed a
motion for reconsideration6 the next day.
On October 28, 1998, public respondent issued the second assailed Order7 denying
petitioner's motion for reconsideration. Hence, this recourse.
We dismiss the petition.
Petitioner contends that the Ombudsman has no jurisdiction over the subject matter of the
controversy since the PNRC is allegedly a private voluntary organization. The following
circumstances, she insists, are indicative of the private character of the organization: (1)
the PNRC does not receive any budgetary support from the government, and that all
money given to it by the latter and its instrumentalities become private funds of the
organization; (2) funds for the payment of personnel's salaries and other emoluments
come from yearly fund campaigns, private contributions and rentals from its properties;
and (3) it is not audited by the Commission on Audit. Petitioner states that the PNRC falls
under the International Federation of Red Cross, a Switzerland-based organization, and
that the power to discipline employees accused of misconduct, malfeasance, or
immorality belongs to the PNRC Secretary General by virtue of Section "G", Article IX
of its by-laws.8 She threatens that "to classify the PNRC as a government-owned or
controlled corporation would create a dangerous precedent as it would lose its neutrality,
independence and impartiality . . . .9
Practically the same issue was addressed in Camporedondo v. National Labor Relations

Commission, et. al.,10 where an almost identical set of facts obtained. Petitioner therein
was the administrator of the Surigao del Norte chapter of the PNRC. An audit conducted
by a field auditor revealed a shortage in the chapter funds in the sum of P109,000.00.
When required to restitute the amount of P135,927.78, petitioner therein instead applied
for early retirement, which was denied by the Secretary General of the PNRC.
Subsequently, the petitioner filed a complaint for illegal dismissal and damages against
PNRC before the National Labor Relations Commission. In turn, PNRC moved to
dismiss the complaint on the ground of lack of jurisdiction, averring that PNRC was a
government corporation whose employees are embraced by civil service regulation. The
labor arbiter dismissed the complaint, and the Commission sustained his order. The
petitioner assailed the dismissal of his complaint via a petition for certiorari, contending
that the PNRC is a private organization and not a government-owned or controlled
corporation. In dismissing the petition, we ruled thus:
Resolving the issue set out in the opening paragraph of this opinion, we rule that the
Philippine National Red Cross (PNRC) is a government owned and controlled
corporation, with an original charter under Republic Act No. 95, as amended. The test to
determine whether a corporation is government owned or controlled, or private in nature
is simple. Is it created by its own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with special charters are
government corporations subject to its provisions, and its employees are under the
jurisdiction of the Civil Service Commission, and are compulsory members of the
Government Service Insurance System. The PNRC was not "impliedly converted to a
private corporation" simply because its charter was amended to vest in it the authority to
secure loans, be exempted from payment of all duties, taxes, fees and other charges of all
kinds on all importations and purchases for its exclusive use, on donations for its disaster
relief work and other services and in its benefits and fund raising drives, and be allotted
one lottery draw a year by the Philippine Charity Sweepstakes Office for the support of
its disaster relief operation in addition to its existing lottery draws for blood program.
Clearly then, public respondent has jurisdiction over the matter, pursuant to Section 13, of
Republic Act No. 6770, otherwise known as "The Ombudsman Act of 1989", to wit:
Sec. 13. Mandate. The Ombudsman and his Deputies, as protectors of the people, shall
act promptly on complaints filed in any form or manner against officers or employees of
the Government, or of any subdivision, agency or instrumentality thereof, including
government-owned or controlled corporations, and enforce their administrative, civil and
criminal liability in ever case where the evidence warrants in order to promote efficient
service by the Government to the people.11
WHEREFORE, the petition for certiorari is hereby DISMISSED. Costs against petitioner.
SO ORDERED.

EN BANC
THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R.
Acorda,
Petitioner,
- versus Hon. ANGELO T. REYES in his capacity as Secretary of National Defense; and Hon.
EDGARDO E. BATENGA in his capacity as Undersecretary for Civil Relations and
Administration of the Department of National Defense,
Respondents.
G. R. No. 155027
February 28, 2006
x--------------------------------------------------x
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil
Procedure, with a prayer to declare as void Department Circular No. 04 of the
Department of National Defense (DND), dated 10 June 2002.
Petitioner in this case is the Veterans Federation of the Philippines (VFP), a corporate
body organized under Republic Act No. 2640, dated 18 June 1960, as amended, and duly
registered with the Securities and Exchange Commission. Respondent Angelo T. Reyes
was the Secretary of National Defense (DND Secretary) who issued the assailed
Department Circular No. 04, dated 10 June 2002. Respondent Edgardo E. Batenga was
the DND Undersecretary for Civil Relations and Administration who was tasked by the
respondent DND Secretary to conduct an extensive management audit of the records of
petitioner.
The factual and procedural antecedents of this case are as follows:
Petitioner VFP was created under Rep. Act No. 2640,[1] a statute approved on 18 June
1960.
On 15 April 2002, petitioners incumbent president received a letter dated 13 April 2002

which reads:
Col. Emmanuel V. De Ocampo (Ret.)
President
Veterans Federation of the Philippines
Makati, Metro Manila
Dear Col. De Ocampo:
Please be informed that during the preparation of my briefing before the Cabinet and the
President last March 9, 2002, we came across some legal bases which tended to show that
there is an organizational and management relationship between Veterans Federation of
the Philippines and the Philippine Veterans Bank which for many years have been
inadvertently overlooked.
I refer to Republic Act 2640 creating the body corporate known as the VFP and Republic
Act 3518 creating the Phil. Vets [sic] Bank.
1.
RA 2640 dated 18 June 60 Section 1 ... hereby created a body corporate,
under the control and supervision of the Secretary of National Defense.
2.
RA 2640 Section 12 ... On or before the last day of the month following the
end of each fiscal year, the Federation shall make and transmit to the President of the
Philippines or to the Secretary of National Defense, a report of its proceedings for the
past year, including a full, complete and itemized report of receipts and expenditures of
whatever kind.
3.
Republic Act 3518 dated 18 June 1963 (An Act Creating the Philippine
Veterans Bank, and for Other Purposes) provides in Section 6 that ... the affairs and
business of the Philippine Veterans Bank shall be directed and its property managed,
controlled and preserved, unless otherwise provided in this Act, by a Board of Directors
consisting of eleven (11) members to be composed of three ex officio members to wit: the
Philippine Veterans Administrator, the President of the Veterans Federation of the
Philippines and the Secretary of National Defense x x x.
It is therefore in the context of clarification and rectification of what should have been
done by the DND (Department of National Defense) for and about the VFP and PVB that
I am requesting appropriate information and report about these two corporate bodies.
Therefore it may become necessary that a conference with your staffs in these two bodies
be set.
Thank you and anticipating your action on this request.
Very truly yours,
(SGD) ANGELO T. REYES

[DND] Secretary
On 10 June 2002, respondent DND Secretary issued the assailed DND Department
Circular No. 04 entitled, Further Implementing the Provisions of Sections 1[2] and 2[3]
of Republic Act No. 2640, the full text of which appears as follows:
Department of National Defense
Department Circular No. 04
Subject: Further Implementing the Provisions of Sections 1 & 2 of
Republic Act No. 2640
Authority: Republic Act No. 2640
Executive Order No. 292 dated July 25, 1987
Section 1
These rules shall govern and apply to the management and operations of the Veterans
Federation of the Philippines (VFP) within the context provided by EO 292 s-1987.
Section 2 DEFINITION OF TERMS for the purpose of these rules, the terms, phrases or
words used herein shall, unless the context indicates otherwise, mean or be understood as
follows:
Supervision and Control it shall include authority to act directly whenever a specific
function is entrusted by law or regulation to a subordinate; direct the performance of a
duty; restrain the commission of acts; approve, reverse or modify acts and decisions of
subordinate officials or units; determine priorities in the execution of plans and programs;
and prescribe standards, guidelines, plans and programs.
Power of Control power to alter, modify, nullify or set aside what a subordinate officer
had done in the performance of his duties and to substitute the judgment of the former to
that of the latter.
Supervision means overseeing or the power of an officer to see to it that their subordinate
officers perform their duties; it does not allow the superior to annul the acts of the
subordinate.
Administrative Process embraces matter concerning the procedure in the disposition of
both routine and contested matters, and the matter in which determinations are made,
enforced or reviewed.
Government Agency as defined under PD 1445, a government agency or agency of
government or agency refers to any department, bureau or office of the national
government, or any of its branches or instrumentalities, of any political subdivision, as

well as any government owned or controlled corporation, including its subsidiaries, or

other self-governing board or commission of the government.
Government Owned and Controlled Corporation (GOCC) refer to any agency organized
as a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the government directly or
through its instrumentalities wholly or, where applicable as in the case of stock
corporations, to the extent of at least 50% of its capital stock.
Fund sum of money or other resources set aside for the purpose of carrying out specific
activities or attaining certain objectives in accordance with special regulations,
restrictions or limitations and constitutes an independent, fiscal and accounting entity.
Government Fund includes public monies of every sort and other resources pertaining to
any agency of the government.
Veteran any person who rendered military service in the land, sea or air forces of the
Philippines during the revolution against Spain, the Philippine American War, World War
II, including Filipino citizens who served in Allied Forces in the Philippine territory and
foreign nationals who served in Philippine forces; the Korean campaign, the Vietnam
campaign, the Anti-dissidence campaign, or other wars or military campaigns; or who
rendered military service in the Armed Forces of the Philippines and has been honorably
discharged or separated after at least six (6) years total cumulative active service or
sooner separated due to the death or disability arising from a wound or injury received or
sickness or disease incurred in line of duty while in the active service.
Section 3 Relationship Between the DND and the VFP
3.1 Sec 1 of RA 3140 provides ... the following persons (heads of various veterans
associations and organizations in the Philippines) and their associates and successors are
hereby created a body corporate, under the control and supervision of the Secretary of
National Defense, under the name, style and title of "Veterans Federation of the
Philippines ...
The Secretary of National Defense shall be charged with the duty of supervising the
veterans and allied program under the jurisdiction of the Department. It shall also have
the responsibility of overseeing and ensuring the judicious and effective implementation
of veterans assistance, benefits, and utilization of VFP assets.
3.2 To effectively supervise and control the corporate affairs of the Federation and to
safeguard the interests and welfare of the veterans who are also wards of the State
entrusted under the protection of the DND, the Secretary may personally or through a
designated representative, require the submission of reports, documents and other papers
regarding any or all of the Federations business transactions particularly those relating to
the VFP functions under Section 2 of RA 2640.

The Secretary or his representative may attend conferences of the supreme council of the
VFP and such other activities he may deem relevant.
3.3 The Secretary shall from time to time issue guidelines, directives and other orders
governing vital government activities including, but not limited to, the conduct of
elections; the acquisition, management and dispositions of properties, the accounting of
funds, financial interests, stocks and bonds, corporate investments, etc. and such other
transactions which may affect the interests of the veterans.
3.4 Financial transactions of the Federation shall follow the provisions of the government
auditing code (PD 1445) i.e. government funds shall be spent or used for public purposes;
trust funds shall be available and may be spent only for the specific purpose for which the
trust was created or the funds received; fiscal responsibility shall, to the greatest extent,
be shared by all those exercising authority over the financial affairs, transactions, and
operations of the federation; disbursements or dispositions of government funds or
property shall invariably bear the approval of the proper officials.
Section 4 Records of the FEDERATION
As a corporate body and in accordance with appropriate laws, it shall keep and carefully
preserve records of all business transactions, minutes of meetings of
stockholders/members of the board of directors reflecting all details about such activity.
All such records and minutes shall be open to directors, trustees, stockholders, and other
members for inspection and copies of which may be requested.
As a body corporate, it shall submit the following: annual report; proceedings of council
meetings; report of operations together with financial statement of its assets and liabilities
and fund balance per year; statement of revenues and expenses per year; statement of
cash flows per year as certified by the accountant; and other documents/reports as may be
necessary or required by the SND.
Section 5 Submission of Annual and Periodic Report
As mandated under appropriate laws, the following reports shall be submitted to the
SND, to wit:
a.
Annual Report to be submitted not later than every January 31 of the following
year. Said report shall consist of the following:
1.
Financial Report of the Federation, signed by the Treasurer General and Auditor
General;
2. Roster of Members of the Supreme Council;
3. Roster of Members of the Executive Board and National Officers; and
4. Current listing of officers and management of VFP.

b.
Report on the proceedings of each Supreme Council Meeting to be submitted not
later than one month after the meeting;
c.
Report of the VFP President as may be required by SND or as may be found
necessary by the President of the Federation;
d.
Resolutions passed by the Executive Board and the Supreme Council for
confirmation to be submitted not later than one month after the approval of the resolution;
e.
After Operation/Activity Reports to be submitted not later than one month after
such operation or activity;
Section 6 Penal Sanctions
As an attached agency to a regular department of the government, the VFP and all its
instrumentalities, officials and personnel shall be subject to the penal provisions of such
laws, rules and regulations applicable to the attached agencies of the government.
In a letter dated 6 August 2002 addressed to the President of petitioner, respondent DND
Secretary reiterated his instructions in his earlier letter of 13 April 2002.
Thereafter, petitioners President received a letter dated 23 August 2002 from respondent
Undersecretary, informing him that Department Order No. 129 dated 23 August 2002
directed the conduct of a Management Audit of the Veterans Federation of the
Philippines.[4] The letter went on to state that respondent DND Secretary believes that
the mandate given by said law can be meaningfully exercised if this department can
better appreciate the functions, responsibilities and situation on the ground and this can
be done by undertaking a thorough study of the organization.[5]
Respondent Undersecretary also requested both for a briefing and for documents on
personnel, ongoing projects and petitioners financial condition. The letter ended by
stating that, after the briefing, the support staff of the Audit Committee would begin their
work to meet the one-month target within which to submit a report.
A letter dated 28 August 2003 informed petitioners President that the Management Audit
Group headed by the Undersecretary would be paying petitioner a visit on 30 August
2002 for an update on VFPs different affiliates and the financial statement of the
Federation.
Subsequently, the Secretary General of the VFP sent an undated letter to respondent DND
Secretary, with notice to respondent Undersecretary for Civil Relations and
Administration, complaining about the alleged broadness of the scope of the management
audit and requesting the suspension thereof until such time that specific areas of the audit
shall have been agreed upon.

The request was, however, denied by the Undersecretary in a letter dated 4 September
2002 on the ground that a specific timeframe had been set for the activity.
Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65 of the 1997
Rules of Civil Procedure, praying for the following reliefs:
1.
For this Court to issue a temporary restraining order and a writ of
preliminary prohibitory and mandatory injunction to enjoin respondent Secretary and all
those acting under his discretion and authority from: (a) implementing DND Department
Circular No. 04; and (b) continuing with the ongoing management audit of petitioners
books of account;
2.

After hearing the issues on notice

a.
Declare DND Department Circular No. 04 as null and void for being ultra
vires;
b.
Convert the writ of prohibition, preliminary prohibitory and mandatory
injunction into a permanent one.[6]
GIVING DUE COURSE TO THE PETITION
Petitioner asserts that, although cases which question the constitutionality or validity of
administrative issuances are ordinarily filed with the lower courts, the urgency and
substantive importance of the question on hand and the public interest attendant to the
subject matter of the petition justify its being filed with this Court directly as an original
action.[7]
It is settled that the Regional Trial Court and the Court of Appeals also exercise original
jurisdiction over petitions for certiorari and prohibition. As we have held in numerous
occasions, however, such concurrence of original jurisdiction does not mean that the
party seeking extraordinary writs has the absolute freedom to file his petition in the court
of his choice.[8] Thus, in Commissioner of Internal Revenue v. Leal,[9] we held that:
Such concurrence of original jurisdiction among the Regional Trial Court, the Court of
Appeals and this Court, however, does not mean that the party seeking any of the
extraordinary writs has the absolute freedom to file his petition in the court of his choice.
The hierarchy of courts in our judicial system determines the appropriate forum for these
petitions. Thus, petitions for the issuance of the said writs against the first level (inferior)
courts must be filed with the Regional Trial Court and those against the latter, with the
Court of Appeals. A direct invocation of this Courts original jurisdiction to issue these
writs should be allowed only where there are special and important reasons therefor,
specifically and sufficiently set forth in the petition. This is the established policy to
prevent inordinate demands upon the Courts time and attention, which are better devoted
to matters within its exclusive jurisdiction, and to prevent further over-crowding of the
Courts docket. Thus, it was proper for petitioner to institute the special civil action for
certiorari with the Court of Appeals assailing the RTC order denying his motion to
dismiss based on lack of jurisdiction.

The petition itself, in this case, does not specifically and sufficiently set forth the special
and important reasons why the Court should give due course to this petition in the first
instance, hereby failing to fulfill the conditions set forth in Commissioner of Internal
Revenue v. Leal.[10] While we reiterate the policies set forth in Leal and allied cases and
continue to abhor the propensity of a number of litigants to disregard the principle of
hierarchy of courts in our judicial system, we, however, resolve to take judicial notice of
the fact that the persons who stand to lose in a possible protracted litigation in this case
are war veterans, many of whom have precious little time left to enjoy the benefits that
can be conferred by petitioner corporation. This bickering for the power over petitioner
corporation, an entity created to represent and defend the interests of Filipino veterans,
should be resolved as soon as possible in order for it to once and for all direct its
resources to its rightful beneficiaries all over the country. All these said, we hereby
resolve to give due course to this petition.
ISSUES
Petitioner mainly alleges that the rules and guidelines laid down in the assailed
Department Circular No. 04 expanded the scope of control and supervision beyond what
has been laid down in Rep. Act No. 2640.[11] Petitioner further submits the following
issues to this Court:
1. Was the challenged department circular passed in the valid exercise of the respondent
Secretarys control and supervision?
2. Could the challenged department circular validly lay standards classifying the VFP, an
essentially civilian organization, within the ambit of statutes only applying to government
entities?
3. Does the department circular, which grants respondent direct management control on
the VFP, unduly encroach on the prerogatives of VFPs governing body?
At the heart of all these issues and all of petitioners prayers and assertions in this case is
petitioners claim that it is a private non-government corporation.
CENTRAL ISSUE:
IS THE VFP A PRIVATE CORPORATION?
Petitioner claims that it is not a public nor a governmental entity but a private
organization, and advances this claim to prove that the issuance of DND Department
Circular No. 04 is an invalid exercise of respondent Secretarys control and supervision.
[12]
This Court has defined the power of control as the power of an officer to alter or modify

or nullify or set aside what a subordinate has done in the performance of his duties and to
substitute the judgment of the former to that of the latter.[13] The power of supervision,
on the other hand, means overseeing, or the power or authority of an officer to see that
subordinate officers perform their duties. If the latter fail or neglect to fulfill them, the
former may take such action or step as prescribed by law to make them perform their
duties.[14] These definitions are synonymous with the definitions in the assailed
Department Circular No. 04, while the other provisions of the assailed department
circular are mere consequences of control and supervision as defined.
Thus, in order for petitioners premise to be able to support its conclusion, petitioners
should be deemed to imply either of the following: (1) that it is
unconstitutional/impermissible for the law (Rep. Act No. 2640) to grant control and/or
supervision to the Secretary of National Defense over a private organization, or (2) that
the control and/or supervision that can be granted to the Secretary of National Defense
over a private organization is limited, and is not as strong as they are defined above.
The following provision of the 1935 Constitution, the organic act controlling at the time
of the creation of the VFP in 1960, is relevant:
Section 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned
and controlled by the Government or any subdivision or instrumentality thereof.[15]
On the other hand, its counterparts in the 1973 and 1987 constitutions are the following:
Section 4. The National Assembly shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such corporations
are owned or controlled by the government or any subdivision or instrumentality thereof.
[16]
Sec. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned and controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.[17]
From the foregoing, it is crystal clear that our constitutions explicitly prohibit the
regulation by special laws of private corporations, with the exception of governmentowned or controlled corporations (GOCCs). Hence, it would be impermissible for the law
to grant control of the VFP to a public official if it were neither a public corporation, an
unincorporated governmental entity, nor a GOCC.[18] Said constitutional provisions can
even be read to prohibit the creation itself of the VFP if it were neither of the three
mentioned above, but we cannot go into that in this case since there is no challenge to the
creation of the VFP in the petition as to permit this Court from considering its nullity.
Petitioner vigorously argues that the VFP is a private non-government organization,

pressing on the following contentions:

1. The VFP does not possess the elements which would qualify it as a public office,
particularly the possession/delegation of a portion of sovereign power of government to
be exercised for the benefit of the public;
2. VFP funds are not public funds because
a)
No budgetary appropriations or government funds have been released to the
VFP directly or indirectly from the Department of Budget and Management (DBM);
b)

VFP funds come from membership dues;

c)
The lease rentals raised from the use of government lands reserved for the
VFP are private in character and do not belong to the government. Said rentals are fruits
of VFPs labor and efforts in managing and administering the lands for VFP purposes and
objectives. A close analogy would be any Filipino citizen settling on government land and
who tills the land for his livelihood and sustenance. The fruits of his labor belong to him
and not to the owner of the land. Such fruits are not public funds.
3. Although the juridical personality of the VFP emanates from a statutory charter, the
VFP retains its essential character as a private, civilian federation of veterans voluntarily
formed by the veterans themselves to attain a unity of effort, purpose and objectives, e.g.
a.
The members of the VFP are individual members and retirees from the
public and military service;
b.

Membership in the VFP is voluntary, not compulsory;

c.
The VFP is governed, not by the Civil Service Law, the Articles of War nor
the GSIS Law, but by the Labor Code and the SSS Law;
d.
The VFP has its own Constitution and By-Laws and is governed by a
Supreme Council who are elected from and by the members themselves;
4. The Administrative Code of 1987 does not provide that the VFP is an attached agency,
nor does it provide that it is an entity under the control and supervision of the DND in the
context of the provisions of said code.
5. The DBM declared that the VFP is a non-government organization and issued a
certificate that the VFP has not been a direct recipient of any funds released by the DBM.
These arguments of petitioner notwithstanding, we are constrained to rule that petitioner
is in fact a public corporation. Before responding to petitioners allegations one by one,
here are the more evident reasons why the VFP is a public corporation:

(1)
Rep. Act No. 2640 is entitled An Act to Create a Public Corporation to be
Known as the Veterans Federation of the Philippines, Defining its Powers, and for Other
Purposes.
(2)
Any action or decision of the Federation or of the Supreme Council shall be
subject to the approval of the Secretary of Defense.[19]
(3)
The VFP is required to submit annual reports of its proceedings for the past
year, including a full, complete and itemized report of receipts and expenditures of
whatever kind, to the President of the Philippines or to the Secretary of National Defense.
[20]
(4)
Under Executive Order No. 37 dated 2 December 1992, the VFP was listed
as among the government-owned and controlled corporations that will not be privatized.
(5)
In Ang Bagong Bayani OFW Labor Party v. COMELEC,[21] this Court held
in a minute resolution that the VFP [Veterans Federation Party] is an adjunct of the
government, as it is merely an incarnation of the Veterans Federation of the Philippines.
And now to answer petitioners reasons for insisting that it is a private corporation:
1. Petitioner claims that the VFP does not possess the elements which would qualify it as
a public office, particularly the possession/delegation of a portion of sovereign power of
government to be exercised for the benefit of the public;
In Laurel v. Desierto,[22] we adopted the definition of Mechem of a public office, that it
is the right, authority and duty, created and conferred by law, by which, for a given
period, either fixed by law or enduring at the pleasure of the creating power, an individual
is invested with some portion of the sovereign functions of the government, to be
exercised by him for the benefit of the public.
In the same case, we went on to adopt Mechems view that the delegation to the individual
of some of the sovereign functions of government is [t]he most important characteristic in
determining whether a position is a public office or not.[23] Such portion of the
sovereignty of the country, either legislative, executive or judicial, must attach to the
office for the time being, to be exercised for the public benefit. Unless the powers
conferred are of this nature, the individual is not a public officer. The most important
characteristic which distinguishes an office from an employment or contract is that the
creation and conferring of an office involves a delegation to the individual of some of the
sovereign functions of government, to be exercised by him for the benefit of the public;
that some portion of the sovereignty of the country, either legislative, executive or
judicial, attaches, for the time being, to be exercised for the public benefit. Unless the
powers conferred are of this nature, the individual is not a public officer.[24] The issue,
therefore, is whether the VFAs officers have been delegated some portion of the
sovereignty of the country, to be exercised for the public benefit.
In several cases, we have dealt with the issue of whether certain specific activities can be

classified as sovereign functions. These cases, which deal with activities not immediately
apparent to be sovereign functions, upheld the public sovereign nature of operations
needed either to promote social justice[25] or to stimulate patriotic sentiments and love of
country.[26]
As regards the promotion of social justice as a sovereign function, we held in Agricultural
Credit and Cooperative Financing Administration (ACCFA) v. Confederation of Unions
in Government Corporations and Offices (CUGCO),[27] that the compelling urgency
with which the Constitution speaks of social justice does not leave any doubt that land
reform is not an optional but a compulsory function of sovereignty. The same reason was
used in our declaration that socialized housing is likewise a sovereign function.[28]
Highly significant here is the observation of former Chief Justice Querube Makalintal:
The growing complexities of modern society, however, have rendered this traditional
classification of the functions of government [into constituent and ministrant functions]
quite unrealistic, not to say obsolete. The areas which used to be left to private enterprise
and initiative and which the government was called upon to enter optionally, and only
because it was better equipped to administer for the public welfare than is any private
individual or group of individuals, continue to lose their well-defined boundaries and to
be absorbed within activities that the government must undertake in its sovereign
capacity if it is to meet the increasing social challenges of the times. Here[,] as almost
everywhere else[,] the tendency is undoubtedly towards a greater socialization of
economic forces. Here, of course, this development was envisioned, indeed adopted as a
national policy, by the Constitution itself in its declaration of principle concerning the
promotion of social justice.[29] (Emphasis supplied.)
It was, on the other hand, the fact that the National Centennial Celebrations was
calculated to arouse and stimulate patriotic sentiments and love of country that it was
considered as a sovereign function in Laurel v. Desierto.[30] In Laurel, the Court then
took its cue from a similar case in the United States involving a Fourth of July fireworks
display. The holding of the Centennial Celebrations was held to be an executive function,
as it was intended to enforce Article XIV of the Constitution which provides for the
conservation, promotion and popularization of the nations historical and cultural heritage
and resources, and artistic relations.
In the case at bar, the functions of petitioner corporation enshrined in Section 4 of Rep.
Act No. 2640[31] should most certainly fall within the category of sovereign functions.
The protection of the interests of war veterans is not only meant to promote social justice,
but is also intended to reward patriotism. All of the functions in Section 4 concern the
well-being of war veterans, our countrymen who risked their lives and lost their limbs in
fighting for and defending our nation. It would be injustice of catastrophic proportions to
say that it is beyond sovereigntys power to reward the people who defended her.
Like the holding of the National Centennial Celebrations, the functions of the VFP are
executive functions, designed to implement not just the provisions of Rep. Act No. 2640,

but also, and more importantly, the Constitutional mandate for the State to provide
immediate and adequate care, benefits and other forms of assistance to war veterans and
veterans of military campaigns, their surviving spouses and orphans.[32]
2. Petitioner claims that VFP funds are not public funds.
Petitioner claims that its funds are not public funds because no budgetary appropriations
or government funds have been released to the VFP directly or indirectly from the DBM,
and because VFP funds come from membership dues and lease rentals earned from
administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove
that it is a private corporation. The DBM indeed did not see it fit to propose budgetary
appropriations to the VFP, having itself believed that the VFP is a private corporation.[33]
If the DBM, however, is mistaken as to its conclusion regarding the nature of VFPs
incorporation, its previous assertions will not prevent future budgetary appropriations to
the VFP. The erroneous application of the law by public officers does not bar a
subsequent correct application of the law.[34]
Nevertheless, funds in the hands of the VFP from whatever source are public funds, and
can be used only for public purposes. This is mandated by the following provisions of
Rep. Act No. 2640:
(1)
Section 2 provides that the VFP can only invest its funds for the exclusive
benefit of the Veterans of the Philippines;
(2)
Section 2 likewise provides that (a)ny action or decision of the Federation or
of the Supreme Council shall be subject to the approval of the Secretary of National
Defense. Hence, all activities of the VFP to which the Supreme Council can apply its
funds are subject to the approval of the Secretary of National Defense;
(3)
Section 4 provides that the Federation shall exist solely for the purposes of a
benevolent character, and not for the pecuniary benefit of its members;
(4)
Section 6 provides that all funds of the VFP in excess of operating expenses
are reserved for disbursement, as the Supreme Council may authorize, for the purposes
stated in Section two of this Act;
(5)
Section 10 provides that (a)ny donation or contribution which from time to
time may be made to the Federation by the Government of the Philippines or any of its
subdivisions, branches, offices, agencies or instrumentalities shall be expended by the
Supreme Council only for the purposes mentioned in this Act.; and finally,
(6)
Section 12 requires the submission of annual reports of VFP proceedings for
the past year, including a full, complete and itemized report of receipts and expenditures
of whatever kind, to the President of the Philippines or to the Secretary of National

Defense.
It is important to note here that the membership dues collected from the individual
members of VFPs affiliate organizations do not become public funds while they are still
funds of the affiliate organizations. A close reading of Section 1[35] of Rep. Act No. 2640
reveals that what has been created as a body corporate is not the individual membership
of the affiliate organizations, but merely the aggregation of the heads of the affiliate
organizations. Thus, only the money remitted by the affiliate organizations to the VFP
partake in the public nature of the VFP funds.
In Republic v. COCOFED,[36] we held that the Coconut Levy Funds are public funds
because, inter alia, (1) they were meant to be for the benefit of the coconut industry, one
of the major industries supporting the national economy, and its farmers; and (2) the very
laws governing coconut levies recognize their public character. The same is true with
regard to the VFP funds. No less public is the use for the VFP funds, as such use is
limited to the purposes of the VFP which we have ruled to be sovereign functions.
Likewise, the law governing VFP funds (Rep. Act No. 2640) recognizes the public
character of the funds as shown in the enumerated provisions above.
We also observed in the same COCOFED case that (e)ven if the money is allocated for a
special purpose and raised by special means, it is still public in character.[37] In the case
at bar, some of the funds were raised by even more special means, as the contributions
from affiliate organizations of the VFP can hardly be regarded as enforced contributions
as to be considered taxes. They are more in the nature of donations which have always
been recognized as a source of public funding. Affiliate organizations of the VFP cannot
complain of their contributions becoming public funds upon the receipt by the VFP, since
they are presumed aware of the provisions of Rep. Act No. 2640 which not only specifies
the exclusive purposes for which VFP funds can be used, but also provides for the
regulation of such funds by the national government through the Secretary of National
Defense. There is nothing wrong, whether legally or morally, from raising revenues
through non-traditional methods. As remarked by Justice Florentino Feliciano in his
concurring opinion in Kilosbayan, Incorporated v. Guingona, Jr.[38] where he explained
that the funds raised by the On-line Lottery System were also public in nature, thus:
x x x [T]he more successful the government is in raising revenues by non-traditional
methods such as PAGCOR operations and privatization measures, the lesser will be the
pressure upon the traditional sources of public revenues, i.e., the pocket books of
individual taxpayers and importers.
Petitioner additionally harps on the inapplicability of the case of Laurel v. Desierto[39]
which was cited by respondents. Petitioner claims that among the reasons National
Centennial Commission Chair Salvador Laurel was considered a public officer was the
fact that his compensation was derived from public funds. Having ruled that VFP funds
from whatever source are public funds, we can safely conclude that the Supreme

Councils compensation, taken as they are from VFP funds under the term operating
expenses in Section 6 of Rep. Act No. 2640, are derived from public funds. The particular
nomenclature of the compensation taken from VFP funds is not even of relevance here.
As we said in Laurel concerning compensation as an element of public office:
Under particular circumstances, compensation has been held to include allowance for
personal expenses, commissions, expenses, fees, an honorarium, mileage or traveling
expenses, payments for services, restitution or a balancing of accounts, salary, and wages.
[40]
3. Petitioner argues that it is a civilian federation where membership is voluntary.
Petitioner claims that the Secretary of National Defense historically did not indulge in the
direct or micromanagement of the VFP precisely because it is essentially a civilian
organization where membership is voluntary.[41] This reliance of petitioner on what has
historically been done is erroneous, since laws are not repealed by disuse, custom, or
practice to the contrary.[42] Furthermore, as earlier stated, the erroneous application of
the law by public officers does not bar a subsequent correct application of the law.[43]
Neither is the civilian nature of VFP relevant in this case. The Constitution does not
contain any prohibition, express or implied, against the grant of control and/or
supervision to the Secretary of National Defense over a civilian organization. The Office
of the Secretary of National Defense is itself a civilian office, its occupant being an alter
ego of the civilian Commander-in-Chief. This set-up is the manifestation of the
constitutional principle that civilian authority is, at all times, supreme over the military.
[44] There being no such constitutional prohibition, the creation of a civilian public
organization by Rep. Act No. 2640 is not rendered invalid by its being placed under the
control and supervision of the Secretary of National Defense.
Petitioners stand that the VFP is a private corporation because membership thereto is
voluntary is likewise erroneous. As stated above, the membership of the VFP is not the
individual membership of the affiliate organizations, but merely the aggregation of the
heads of such affiliate organizations. These heads forming the VFP then elect the
Supreme Council and the other officers,[45] of this public corporation.
4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is
an attached agency, and nor does it provide that it is an entity under the control and
supervision of the DND in the context of the provisions of said code.
The Administrative Code, by giving definitions of the various entities covered by it,
acknowledges that its enumeration is not exclusive. The Administrative Code could not
be said to have repealed nor enormously modified Rep. Act No. 2640 by implication, as
such repeal or enormous modification by implication is not favored in statutory
construction.[46]

5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government
organization in its certification that the VFP has not been a direct recipient of any funds
released by the DBM.
Respondents claim that the supposed declaration of the DBM that petitioner is a nongovernment organization is not persuasive, since DBM is not a quasi-judicial agency.
They aver that what we have said of the Bureau of Local Government Finance (BLGF) in
Philippine Long Distance Telephone Company (PLDT) v. City of Davao[47] can be
applied to DBM:
In any case, it is contended, the ruling of the Bureau of Local Government Finance
(BLGF) that petitioners exemption from local taxes has been restored is a
contemporaneous construction of Section 23 [of R.A. No. 7925] and, as such, is entitled
to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court of Tax
Appeals, which is a special court created for the purpose of reviewing tax cases, the
BLGF was created merely to provide consultative services and technical assistance to
local governments and the general public on local taxation and other related matters.
Thus, the rule that the Court will not set aside conclusions rendered by the CTA, which is,
by the very nature of its function, dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority cannot apply in the case of the BLGF.
On this score, though, we disagree with respondents and hold that the DBMs appraisal is
considered persuasive. Respondents misread the PLDT case in asserting that only quasijudicial agencies determination can be considered persuasive. What the PLDT case points
out is that, for an administrative agencys opinion to be persuasive, the administrative
agency involved (whether it has quasi-judicial powers or not) must be an expert in the
field they are giving their opinion on.
The DBM is indeed an expert on determining what the various government agencies and
corporations are. This determination is necessary for the DBM to fulfill its mandate:
Sec. 2. Mandate. - The Department shall be responsible for the formulation and
implementation of the National Budget with the goal of attaining our national socioeconomic plans and objectives.
The Department shall be responsible for the efficient and sound utilization of government
funds and revenues to effectively achieve our country's development objectives.[48]
The persuasiveness of the DBM opinion has, however, been overcome by all the previous
explanations we have laid so far. It has also been eclipsed by another similarly persuasive

opinion, that of the Department of National Defense embodied in Department Circular

No. 04. The DND is clearly more of an expert with respect to the determination of the
entities under it, and its Administrative Rules and Regulations are entitled to great respect
and have in their favor the presumption of legality.[49]
The DBM opinion furthermore suffers from its lack of explanation and justification in the
certification of non-receipt where said opinion was given. The DBM has not furnished, in
said certification or elsewhere, an explanation for its opinion that VFP is a nongovernment organization.
THE FATE OF DEPARTMENT CIRCULAR NO. 04
Our ruling that petitioner is a public corporation is determinative of whether or not we
should grant petitioners prayer to declare Department Circular No. 04 void.
Petitioner assails Department Circular No. 04 on the ground that it expanded the scope of
control and supervision beyond what has been laid down in Rep. Act No. 2640. Petitioner
alleges that (t)he equation of the meaning of `control and `supervision of the
Administrative Code of 1987 as the same `control and supervision under Rep. Act No.
2640, takes out the context of the original legislative intent from the peculiar surrounding
circumstances and conditions that brought about the creation of the VFP.[50] Petitioner
claims that the VFP was intended as a self-governing autonomous body with a Supreme
Council as governing authority, and that the assailed circular pre-empts VFPs original
self-governance and autonomy (in) representing veterans organizations, and substitutes
government discretion and decisions to that of the veterans own determination.[51]
Petitioner says that the circulars provisions practically render the Supreme Council
inutile, despite its being the statutory governing body of the VFP.[52]
As previously mentioned, this Court has defined the power of control as the power of an
officer to alter or modify or nullify or set aside what a subordinate has done in the
performance of his duties and to substitute the judgment of the former to that of the latter.
[53] The power of supervision, on the other hand, means overseeing, or the power or
authority of an officer to see that subordinate officers perform their duties.[54] Under the
Administrative Code of 1987:[55]
Supervision and control shall include the authority to act directly whenever a specific
function is entrusted by law or regulation to a subordinate; direct the performance of
duty; restrain the commission of acts; review, approve, reverse or modify acts and
decisions of subordinate officials or units; determine priorities in the execution of plans
and programs; and prescribe standards, guidelines, plans and programs. x x x
The definition of the power of control and supervision under Section 2 of the assailed
Department Circular are synonymous with the foregoing definitions. Consequently, and
considering that petitioner is a public corporation, the provisions of the assailed
Department Circular No. 04 did not supplant nor modify the provisions of Republic Act

No. 2640, thus not violating the settled rule that all such (administrative) issuances must
not override, but must remain consistent and in harmony with the law they seek to apply
or implement. Administrative rules and regulations are intended to carry out, neither to
supplant nor to modify, the law.[56]
Section 3.2 of the assailed department circular, which authorizes the Secretary of
National Defense to x x x personally or through a designated representative, require the
submission of reports, documents and other papers regarding any or all of the Federations
business functions, x x x.
as well as Section 3.3 which allows the Secretary of DND to
x x x [F]rom time to time issue guidelines, directives and other orders governing vital
government activities including, but not limited to, the conduct of elections, the
acquisition, management and dispositions of properties, the accounting of funds, financial
interests, stocks and bonds, corporate investments, etc. and such other transactions which
may affect the interests of the veterans.
are merely consequences of both the power of control and supervision granted by Rep.
Act No. 2640. The power to alter or modify or nullify or set aside what a subordinate has
done in the performance of his duties, or to see to it that subordinate officers perform
their duties in accordance with law, necessarily requires the ability of the superior officer
to monitor, as closely as it desires, the acts of the subordinate.
The same is true with respect to Sections 4 and 5 of the assailed Department Circular No.
04, which requires the preservation of the records of the Federation and the submission to
the Secretary of National Defense of annual and periodic reports.
Petitioner likewise claims that the assailed DND Department Circular No. 04 was never
published, and hence void.[57] Respondents deny such non-publication.[58]
We have put forth both the rule and the exception on the publication of administrative
rules and regulations in the case of Taada v. Tuvera:[59]
x x x Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing law pursuant also to a valid delegation.
Interpretative regulations and those merely internal in nature, that is, regulating only the
personnel of the administrative agency and not the public, need not be published. Neither
is publication required of the so-called letters of instructions issued by administrative
superiors concerning the rules on guidelines to be followed by their subordinates in the
performance of their duties.
Even assuming that the assailed circular was not published, its validity is not affected by

such non-publication for the reason that its provisions fall under two of the exceptions
enumerated in Taada.
Department Circular No. 04 is an internal regulation. As we have ruled, they are meant to
regulate a public corporation under the control of DND, and not the public in general. As
likewise discussed above, what has been created as a body corporate by Rep. Act No.
2640 is not the individual membership of the affiliate organizations of the VFP, but
merely the aggregation of the heads of the affiliate organizations. Consequently, the
individual members of the affiliate organizations, who are not public officers, are beyond
the regulation of the circular.
Sections 2, 3 and 6 of the assailed circular are additionally merely interpretative in nature.
They add nothing to the law. They do not affect the substantial rights of any person,
whether party to the case at bar or not. In Sections 2 and 3, control and supervision are
defined, mentioning actions that can be performed as consequences of such control and
supervision, but without specifying the particular actions that shall be rendered to control
and supervise the VFP. Section 6, in the same vein, merely state what the drafters of the
circular perceived to be consequences of being an attached agency to a regular
department of the government, enumerating sanctions and remedies provided by law that
may be availed of whenever desired.
Petitioner then objects to the implementation of Sec. 3.4 of the assailed Department
Circular, which provides that
3.4 Financial transactions of the Federation shall follow the provisions of the government
auditing code (PD 1445) i.e. government funds shall be spent or used for public purposes;
trust funds shall be available and may be spent only for the specific purpose for which the
trust was created or the funds received; fiscal responsibility shall, to the greatest extent,
be shared by all those exercising authority over the financial affairs, transactions, and
operations of the federation; disbursements or dispositions of government funds or
property shall invariably bear the approval of the proper officials.
Since we have also previously determined that VFP funds are public funds, there is
likewise no reason to declare this provision invalid. Section 3.4 is correct in requiring the
VFP funds to be used for public purposes, but only insofar the term public purposes is
construed to mean public purposes enumerated in Rep. Act No. 2640.
Having in their possession public funds, the officers of the VFP, especially its fiscal
officers, must indeed share in the fiscal responsibility to the greatest extent.
As to petitioners allegation that VFP was intended as a self-governing autonomous body
with a Supreme Council as governing authority, we find that the provisions of Rep. Act
No. 2640 concerning the control and supervision of the Secretary of National Defense
clearly withholds from the VFP complete autonomy. To say, however, that such
provisions render the VFP inutile is an exaggeration. An office is not rendered inutile by

the fact that it is placed under the control of a higher office. These subordinate offices,
such as the executive offices under the control of the President, exercise discretion at the
first instance. While their acts can be altered or even set aside by the superior, these acts
are effective and are deemed the acts of the superior until they are modified. Surely, we
cannot say that the offices of all the Department Secretaries are worthless positions.
In sum, the assailed DND Department Circular No. 04 does not supplant nor modify and
is, on the contrary, perfectly in consonance with Rep. Act No. 2640. Petitioner VFP is a
public corporation. As such, it can be placed under the control and supervision of the
Secretary of National Defense, who consequently has the power to conduct an extensive
management audit of petitioner corporation.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The validity of the
Department of National Defense Department Circular No. 04 is AFFIRMED.
SO ORDERED.

G.R. No. 155650

July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF
PARAAQUE, and CITY TREASURER OF PARAAQUE, respondents.
DECISION
CARPIO, J.:
The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Paraaque City under Executive Order No.
903, otherwise known as the Revised Charter of the Manila International Airport
Authority ("MIAA Charter"). Executive Order No. 903 was issued on 21 July 1983 by
then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 9091 and 2982
amended the MIAA Charter.
As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA
approximately 600 hectares of land,3 including the runways and buildings ("Airport
Lands and Buildings") then under the Bureau of Air Transportation.4 The MIAA Charter
further provides that no portion of the land transferred to MIAA shall be disposed of

through sale or any other mode unless specifically approved by the President of the
Philippines.5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued
Opinion No. 061. The OGCC opined that the Local Government Code of 1991 withdrew
the exemption from real estate tax granted to MIAA under Section 21 of the MIAA
Charter. Thus, MIAA negotiated with respondent City of Paraaque to pay the real estate
tax imposed by the City. MIAA then paid some of the real estate tax already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the
City of Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency
is broken down as follows:
TAX DECLARATION
TAXABLE YEAR
TAX DUE
PENALTY
TOTAL
E-016-01370
1992-2001
19,558,160.00
11,201,083.20
30,789,243.20
E-016-01374
1992-2001
111,689,424.90
68,149,479.59
179,838,904.49
E-016-01375
1992-2001

20,276,058.00
12,371,832.00
32,647,890.00
E-016-01376
1992-2001
58,144,028.00
35,477,712.00
93,621,740.00
E-016-01377
1992-2001
18,134,614.65
11,065,188.59
29,199,803.24
E-016-01378
1992-2001
111,107,950.40
67,794,681.59
178,902,631.99
E-016-01379
1992-2001
4,322,340.00
2,637,360.00
6,959,700.00

E-016-01380
1992-2001
7,776,436.00
4,744,944.00
12,521,380.00
*E-016-013-85
1998-2001
6,444,810.00
2,900,164.50
9,344,974.50
*E-016-01387
1998-2001
34,876,800.00
5,694,560.00
50,571,360.00
*E-016-01396
1998-2001
75,240.00
33,858.00
109,098.00
GRAND TOTAL
P392,435,861.95
P232,070,863.47

P 624,506,725.42
1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006
On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy
and warrants of levy on the Airport Lands and Buildings. The Mayor of the City of
Paraaque threatened to sell at public auction the Airport Lands and Buildings should
MIAA fail to pay the real estate tax delinquency. MIAA thus sought a clarification of
OGCC Opinion No. 061.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No.
061. The OGCC pointed out that Section 206 of the Local Government Code requires
persons exempt from real estate tax to show proof of exemption. The OGCC opined that
Section 21 of the MIAA Charter is the proof that MIAA is exempt from real estate tax.
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for
prohibition and injunction, with prayer for preliminary injunction or temporary
restraining order. The petition sought to restrain the City of Paraaque from imposing real
estate tax on, levying against, and auctioning for public sale the Airport Lands and
Buildings. The petition was docketed as CA-G.R. SP No. 66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it
beyond the 60-day reglementary period. The Court of Appeals also denied on 27
September 2002 MIAA's motion for reconsideration and supplemental motion for
reconsideration. Hence, MIAA filed on 5 December 2002 the present petition for review.7
Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the
Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the
public market of Barangay La Huerta; and in the main lobby of the Paraaque City Hall.
The City of Paraaque published the notices in the 3 and 10 January 2003 issues of the
Philippine Daily Inquirer, a newspaper of general circulation in the Philippines. The
notices announced the public auction sale of the Airport Lands and Buildings to the
highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall Building
of Paraaque City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before
this Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary
Restraining Order. The motion sought to restrain respondents the City of Paraaque,
City Mayor of Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of
Paraaque, and the City Assessor of Paraaque ("respondents") from auctioning the
Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public
auction the Airport Lands and Buildings. Respondents received the TRO on the same day
that the Court issued it. However, respondents received the TRO only at 1:25 p.m. or
three hours after the conclusion of the public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Paraaque, and the
Solicitor General subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and
Buildings in the name of MIAA. However, MIAA points out that it cannot claim
ownership over these properties since the real owner of the Airport Lands and Buildings
is the Republic of the Philippines. The MIAA Charter mandates MIAA to devote the
Airport Lands and Buildings for the benefit of the general public. Since the Airport Lands
and Buildings are devoted to public use and public service, the ownership of these
properties remains with the State. The Airport Lands and Buildings are thus inalienable
and are not subject to real estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA
from the payment of real estate tax. MIAA insists that it is also exempt from real estate
tax under Section 234 of the Local Government Code because the Airport Lands and
Buildings are owned by the Republic. To justify the exemption, MIAA invokes the
principle that the government cannot tax itself. MIAA points out that the reason for tax
exemption of public property is that its taxation would not inure to any public advantage,
since in such a case the tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly
withdrew the tax exemption privileges of "government-owned and-controlled
corporations" upon the effectivity of the Local Government Code. Respondents also
argue that a basic rule of statutory construction is that the express mention of one person,
thing, or act excludes all others. An international airport is not among the exceptions
mentioned in Section 193 of the Local Government Code. Thus, respondents assert that
MIAA cannot claim that the Airport Lands and Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8
where we held that the Local Government Code has withdrawn the exemption from real
estate tax granted to international airports. Respondents further argue that since MIAA
has already paid some of the real estate tax assessments, it is now estopped from claiming
that the Airport Lands and Buildings are exempt from real estate tax.
The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of
MIAA are exempt from real estate tax under existing laws. If so exempt, then the real
estate tax assessments issued by the City of Paraaque, and all proceedings taken
pursuant to such assessments, are void. In such event, the other issues raised in this
petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax
imposed by local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality
of the National Government and thus exempt from local taxation. Second, the real
properties of MIAA are owned by the Republic of the Philippines and thus exempt from
real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is
not exempt from real estate tax. Respondents claim that the deletion of the phrase "any
government-owned or controlled so exempt by its charter" in Section 234(e) of the Local
Government Code withdrew the real estate tax exemption of government-owned or
controlled corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real
Property Tax Code enumerating the entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt
from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a
stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x.
(Emphasis supplied)
A government-owned or controlled corporation must be "organized as a stock or nonstock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is
not a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares. Section 10 of the MIAA Charter9 provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00)

Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission
on Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986
to be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided
in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has
no stockholders or voting shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation
must have members. Even if we assume that the Government is considered as the sole
member of MIAA, this will not make MIAA a non-stock corporation. Non-stock
corporations cannot distribute any part of their income to their members. Section 11 of
the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to
the National Treasury.11 This prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized
for charitable, religious, educational, professional, cultural, recreational, fraternal,
literary, scientific, social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers." MIAA is not organized for any of these purposes. MIAA,
a public utility, is organized to operate an international and domestic airport for public
use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA
within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform
efficiently its governmental functions. MIAA is like any other government

instrumentality, the only difference is that MIAA is vested with corporate powers. Section
2(10) of the Introductory Provisions of the Administrative Code defines a government
"instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government instrumentality is
organized as a stock or non-stock corporation, it remains a government instrumentality
exercising not only governmental but also corporate powers. Thus, MIAA exercises the
governmental powers of eminent domain,12 police authority13 and the levying of fees
and charges.14 At the same time, MIAA exercises "all the powers of a corporation under
the Corporation Law, insofar as these powers are not inconsistent with the provisions of
this Executive Order."15
Likewise, when the law makes a government instrumentality operationally autonomous,
the instrumentality remains part of the National Government machinery although not
integrated with the department framework. The MIAA Charter expressly states that
transforming MIAA into a "separate and autonomous body"16 will make its operation
more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do not
become stock or non-stock corporations, which is a necessary condition before an agency
or instrumentality is deemed a government-owned or controlled corporation. Examples
are the Mactan International Airport Authority, the Philippine Ports Authority, the
University of the Philippines and Bangko Sentral ng Pilipinas. All these government
instrumentalities exercise corporate powers but they are not organized as stock or nonstock corporations as required by Section 2(13) of the Introductory Provisions of the
Administrative Code. These government instrumentalities are sometimes loosely called
government corporate entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative Code, which is the
governing law defining the legal relationship and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the power
to tax. While the 1987 Constitution now includes taxation as one of the powers of local
governments, local governments may only exercise such power "subject to such
guidelines and limitations as the Congress may provide."18
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local governments. The rule is
that a tax is never presumed and there must be clear language in the law imposing the tax.
Any doubt whether a person, article or activity is taxable is resolved against taxation.
This rule applies with greater force when local governments seek to tax national
government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the
national government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of
the government itself or its agencies. In such case the practical effect of an exemption is
merely to reduce the amount of money that has to be handled by government in the
course of its operations. For these reasons, provisions granting exemptions to government
agencies may be construed liberally, in favor of non tax-liability of such agencies.19
There is, moreover, no point in national and local governments taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one government
pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound and
compelling policy considerations. There must be express language in the law empowering
local governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided"
in the Code, local governments cannot tax national government instrumentalities. As this
Court held in Basco v. Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into

execution the powers vested in the federal government. (MC Culloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in such
a way as to prevent it from consummating its federal responsibilities, or even to seriously
burden it in the accomplishment of them." (Antieau, Modern Constitutional Law, Vol. 2,
p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of
the very entity which has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public use or
for public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the

Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the
State," are owned by the State. The term "ports" includes seaports and airports. The
MIAA Airport Lands and Buildings constitute a "port" constructed by the State. Under
Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by the
public for international and domestic travel and transportation. The fact that the MIAA
collects terminal fees and other charges from the public does not remove the character of
the Airport Lands and Buildings as properties for public use. The operation by the
government of a tollway does not change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the public indirectly through
the taxes they pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system is even a
more efficient and equitable manner of taxing the public for the maintenance of public
roads.
The charging of fees to the public does not determine the character of the property
whether it is of public dominion or not. Article 420 of the Civil Code defines property of
public dominion as one "intended for public use." Even if the government collects toll
fees, the road is still "intended for public use" if anyone can use the road under the same
terms and conditions as the rest of the public. The charging of fees, the limitation on the
kind of vehicles that can use the road, the speed restrictions and other conditions for the
use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges
to airlines, constitute the bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as an airport for public
use. Such fees are often termed user's tax. This means taxing those among the public who
actually use a public facility instead of taxing all the public including those who never
use the particular public facility. A user's tax is more equitable a principle of taxation
mandated in the 1987 Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport
of the Philippines for both international and domestic air traffic,"22 are properties of
public dominion because they are intended for public use. As properties of public
dominion, they indisputably belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are
properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are outside the commerce of man. The Court has ruled repeatedly that
properties of public dominion are outside the commerce of man. As early as 1915, this
Court already ruled in Municipality of Cavite v. Rojas that properties devoted to public
use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in
towns comprises the provincial and town roads, the squares, streets, fountains, and public
waters, the promenades, and public works of general service supported by said towns or
provinces."
The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease
it for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or
public place to the defendant for private use the plaintiff municipality exceeded its
authority in the exercise of its powers by executing a contract over a thing of which it
could not dispose, nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are outside of
this commerce, as was decided by the supreme court of Spain in its decision of February
12, 1895, which says: "Communal things that cannot be sold because they are by their
very nature outside of commerce are those for public use, such as the plazas, streets,
common lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public
dominion are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case
of war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when
the emergency has ceased, said temporary occupation or use must also cease, and the
town officials should see to it that the town plazas should ever be kept open to the public
and free from encumbrances or illegal private constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of
man, cannot be the subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy, encumbrance
or disposition through public or private sale. Any encumbrance, levy on execution or
auction sale of any property of public dominion is void for being contrary to public
policy. Essential public services will stop if properties of public dominion are subject to
encumbrances, foreclosures and auction sale. This will happen if the City of Paraaque
can foreclose and compel the auction sale of the 600-hectare runway of the MIAA for
non-payment of real estate tax.
Before MIAA can encumber26 the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the
Public Land Law or Commonwealth Act No. 141, which "remains to this day the existing

general law governing the classification and disposition of lands of the public domain
other than timber and mineral lands,"27 provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of
its branches, or of the inhabitants thereof, in accordance with regulations prescribed for
this purposes, or for quasi-public uses or purposes when the public interest requires it,
including reservations for highways, rights of way for railroads, hydraulic power sites,
irrigation systems, communal pastures or lequas communales, public parks, public
quarries, public fishponds, working men's village and other improvements for the public
benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of Section eightythree shall be non-alienable and shall not be subject to occupation, entry, sale, lease, or
other disposition until again declared alienable under the provisions of this Act or by
proclamation of the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and
Buildings from public use, these properties remain properties of public dominion and are
inalienable. Since the Airport Lands and Buildings are inalienable in their present status
as properties of public dominion, they are not subject to levy on execution or foreclosure
sale. As long as the Airport Lands and Buildings are reserved for public use, their
ownership remains with the State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is not
otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;
x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are properties of
public dominion, owned by the Republic and outside the commerce of man.
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.
Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like
MIAA to hold title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be
executed in behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the Philippines, by
the President, unless the authority therefor is expressly vested by law in another officer.
(2) For property belonging to the Republic of the Philippines but titled in the name of any
political subdivision or of any corporate agency or instrumentality, by the executive head
of the agency or instrumentality. (Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer
because even its executive head cannot sign the deed of conveyance on behalf of the
Republic. Only the President of the Republic can sign such deed of conveyance.28
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. x x x x
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The
Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive
Order and the corresponding title to be issued in the name of the Authority. Any portion
thereof shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines. (Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging
to the Bureau of Air Transportation relating to airport works or air operations, including
all equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau
of Air Transportation and Transitory Provisions. The Manila International Airport
including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.
x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the
Republic receiving cash, promissory notes or even stock since MIAA is not a stock
corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the
Airport Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines
for both international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to
be upgraded to meet the current and future air traffic and other demands of aviation in
Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous body;
and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to
MIAA was not meant to transfer beneficial ownership of these assets from the Republic
to MIAA. The purpose was merely to reorganize a division in the Bureau of Air
Transportation into a separate and autonomous body. The Republic remains the beneficial
owner of the Airport Lands and Buildings. MIAA itself is owned solely by the Republic.
No party claims any ownership rights over MIAA's assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be
disposed through sale or through any other mode unless specifically approved by the
President of the Philippines." This only means that the Republic retained the beneficial
ownership of the Airport Lands and Buildings because under Article 428 of the Civil
Code, only the "owner has the right to x x x dispose of a thing." Since MIAA cannot
dispose of the Airport Lands and Buildings, MIAA does not own the Airport Lands and
Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the
MIAA Charter, the President is the only one who can authorize the sale or disposition of
the Airport Lands and Buildings. This only confirms that the Airport Lands and Buildings
belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal
property owned by the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing "[t]axes, fees or charges of any kind on the
National Government, its agencies and instrumentalities x x x." The real properties
owned by the Republic are titled either in the name of the Republic itself or in the name
of agencies or instrumentalities of the National Government. The Administrative Code
allows real property owned by the Republic to be titled in the name of agencies or
instrumentalities of the national government. Such real properties remain owned by the
Republic and continue to be exempt from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real property is
transferred to an agency or instrumentality even as the Republic remains the owner of the
real property. Such arrangement does not result in the loss of the tax exemption. Section
234(a) of the Local Government Code states that real property owned by the Republic
loses its tax exemption only if the "beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person." MIAA, as a government instrumentality,
is not a taxable person under Section 133(o) of the Local Government Code. Thus, even
if we assume that the Republic has granted to MIAA the beneficial use of the Airport
Lands and Buildings, such fact does not make these real properties subject to real estate
tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such a
case, MIAA has granted the beneficial use of such land area for a consideration to a
taxable person and therefore such land area is subject to real estate tax. In Lung Center of
the Philippines v. Quezon City, the Court ruled:
Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such taxes.
On the other hand, the portions of the land occupied by the hospital and portions of the

hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.29
3. Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because Section
193 of the Local Government Code of 1991 withdrew the tax exemption of "all persons,
whether natural or juridical" upon the effectivity of the Code. Section 193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions are hereby withdrawn upon
effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues that
since the Local Government Code withdrew the tax exemption of all juridical persons,
then MIAA is not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To repeat,
the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized under our
laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus, the
determinative test is not just whether MIAA is a GOCC, but whether MIAA is a juridical
person at all. (Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local
taxation is its status whether MIAA is a juridical person or not. The minority also
insists that "Sections 193 and 234 may be examined in isolation from Section 133(o) to
ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government
Code expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise
provided in this Code." Now, Section 133(o) of the Local Government Code expressly
provides otherwise, specifically prohibiting local governments from imposing any kind of
tax on national government instrumentalities. Section 133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose
any kind of tax on national government instrumentalities like the MIAA. Local
governments are devoid of power to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not extend to the national
government, its agencies and instrumentalities, "[u]nless otherwise provided in this
Code" as stated in the saving clause of Section 133. The saving clause refers to Section
234(a) on the exception to the exemption from real estate tax of real property owned by
the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical
persons are subject to tax by local governments. The minority insists that the juridical
persons exempt from local taxation are limited to the three classes of entities specifically
enumerated as exempt in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and nonprofit hospitals and educational institutions. It would be belaboring the obvious why the
MIAA does not fall within any of the exempt entities under Section 193. (Emphasis
supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the
Local Government Code. This theory will result in gross absurdities. It will make the
national government, which itself is a juridical person, subject to tax by local
governments since the national government is not included in the enumeration of exempt
entities in Section 193. Under this theory, local governments can impose any kind of local
tax, and not only real estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax.
Some of the national government instrumentalities vested by law with juridical
personalities are: Bangko Sentral ng Pilipinas,30 Philippine Rice Research Institute,31
Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion
Development Authority,34 Philippine Ports Authority,35 Cagayan de Oro Port
Authority,36 San Fernando Port Authority,37 Cebu Port Authority,38 and Philippine
National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which
expressly prohibits local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) does not distinguish between national

government instrumentalities with or without juridical personalities. Where the law does
not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all national
government instrumentalities, with or without juridical personalities. The determinative
test whether MIAA is exempt from local taxation is not whether MIAA is a juridical
person, but whether it is a national government instrumentality under Section 133(o) of
the Local Government Code. Section 133(o) is the specific provision of law prohibiting
local governments from imposing any kind of tax on the national government, its
agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless
otherwise provided in this Code." This means that unless the Local Government Code
grants an express authorization, local governments have no power to tax the national
government, its agencies and instrumentalities. Clearly, the rule is local governments
have no power to tax the national government, its agencies and instrumentalities. As an
exception to this rule, local governments may tax the national government, its agencies
and instrumentalities only if the Local Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section
234(a) of the Code, which makes the national government subject to real estate tax when
it gives the beneficial use of its real properties to a taxable entity. Section 234(a) of the
Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate
tax. The exception to this exemption is when the government gives the beneficial use of
the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to
any other tax. The justification for the exception to the exemption is that the real property,
although owned by the Republic, is not devoted to public use or public service but
devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the
Local Government Code, the later provisions prevail over Section 133. Thus, the minority
asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on one
hand, and Sections 193 and 234 on the other. No one has urged that there is such a
conflict, much less has any one presenteda persuasive argument that there is such a
conflict. The minority's assumption of an irreconcilable conflict in the statutory
provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193
states "[u]nless otherwise provided in this Code." By its own words, Section 193 admits
the superiority of other provisions of the Local Government Code that limit the exercise
of the taxing power in Section 193. When a provision of law grants a power but
withholds such power on certain matters, there is no conflict between the grant of power
and the withholding of power. The grantee of the power simply cannot exercise the power
on matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to
tax, and not merely the exercise of a delegated power to tax. Section 133 states that the
taxing powers of local governments "shall not extend to the levy" of any kind of tax on
the national government, its agencies and instrumentalities. There is no clearer limitation
on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local
governments such taxing powers. By their very meaning and purpose, the "common
limitations" on the taxing power prevail over the grant or exercise of the taxing power. If
the taxing power of local governments in Section 193 prevails over the limitations on
such taxing power in Section 133, then local governments can impose any kind of tax on
the national government, its agencies and instrumentalities a gross absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant
to the saving clause in Section 133 stating "[u]nless otherwise provided in this Code."
This exception which is an exception to the exemption of the Republic from real estate
tax imposed by local governments refers to Section 234(a) of the Code. The exception
to the exemption in Section 234(a) subjects real property owned by the Republic, whether
titled in the name of the national government, its agencies or instrumentalities, to real
estate tax if the beneficial use of such property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase

"government-owned or controlled corporation" is not controlling. The minority points out

that Section 2 of the Introductory Provisions of the Administrative Code admits that its
definitions are not controlling when it provides:
SEC. 2. General Terms Defined. Unless the specific words of the text, or the context
as a whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is
"flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the
Administrative Code. However, this does not automatically mean that the definition in the
Administrative Code does not apply to the Local Government Code. Section 2 of the
Administrative Code clearly states that "unless the specific words x x x of a particular
statute shall require a different meaning," the definition in Section 2 of the Administrative
Code shall apply. Thus, unless there is specific language in the Local Government Code
defining the phrase "government-owned or controlled corporation" differently from the
definition in the Administrative Code, the definition in the Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining the
phrase "government-owned or controlled corporation" differently from the definition in
the Administrative Code. Indeed, there is none. The Local Government Code is silent on
the definition of the phrase "government-owned or controlled corporation." The
Administrative Code, however, expressly defines the phrase "government-owned or
controlled corporation." The inescapable conclusion is that the Administrative Code
definition of the phrase "government-owned or controlled corporation" applies to the
Local Government Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in
a unified document the major structural, functional and procedural principles and rules of
governance." Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities.
Unless a statute expressly provides for a different status and relationship for a specific
government unit or entity, the provisions of the Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled
corporation" should apply only to corporations organized under the Corporation Code,
the general incorporation law, and not to corporations created by special charters. The
minority sees no reason why government corporations with special charters should have a
capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under the
Administrative Code refer to those corporations owned by the government or its

instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital structure
for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the
Constitution and existing legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or controlled
corporation" does not distinguish between one incorporated under the Corporation Code
or under a special charter. Where the law does not distinguish, courts should not
distinguish.
Second, Congress has created through special charters several government-owned
corporations organized as stock corporations. Prime examples are the Land Bank of the
Philippines and the Development Bank of the Philippines. The special charter40 of the
Land Bank of the Philippines provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion
pesos, divided into seven hundred and eighty million common shares with a par value of
ten pesos each, which shall be fully subscribed by the Government, and one hundred and
twenty million preferred shares with a par value of ten pesos each, which shall be issued
in accordance with the provisions of Sections seventy-seven and eighty-three of this
Code. (Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall
be Five Billion Pesos to be divided into Fifty Million common shares with par value of
P100 per share. These shares are available for subscription by the National Government.
Upon the effectivity of this Charter, the National Government shall subscribe to TwentyFive Million common shares of stock worth Two Billion Five Hundred Million which
shall be deemed paid for by the Government with the net asset values of the Bank
remaining after the transfer of assets and liabilities as provided in Section 30 hereof.
(Emphasis supplied)
Other government-owned corporations organized as stock corporations under their
special charters are the Philippine Crop Insurance Corporation,42 Philippine International
Trading Corporation,43 and the Philippine National Bank44 before it was reorganized as
a stock corporation under the Corporation Code. All these government-owned
corporations organized under special charters as stock corporations are subject to real

estate tax on real properties owned by them. To rule that they are not government-owned
or controlled corporations because they are not registered with the Securities and
Exchange Commission would remove them from the reach of Section 234 of the Local
Government Code, thus exempting them from real estate tax.
Third, the government-owned or controlled corporations created through special charters
are those that meet the two conditions prescribed in Section 16, Article XII of the
Constitution. The first condition is that the government-owned or controlled corporation
must be established for the common good. The second condition is that the governmentowned or controlled corporation must meet the test of economic viability. Section 16,
Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability. (Emphasis and underscoring
supplied)
The Constitution expressly authorizes the legislature to create "government-owned or
controlled corporations" through special charters only if these entities are required to
meet the twin conditions of common good and economic viability. In other words,
Congress has no power to create government-owned or controlled corporations with
special charters unless they are made to comply with the two conditions of common good
and economic viability. The test of economic viability applies only to government-owned
or controlled corporations that perform economic or commercial activities and need to
compete in the market place. Being essentially economic vehicles of the State for the
common good meaning for economic development purposes these governmentowned or controlled corporations with special charters are usually organized as stock
corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing
governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that
every modern State must provide its citizens. These instrumentalities need not be
economically viable since the government may even subsidize their entire operations.
These instrumentalities are not the "government-owned or controlled corporations"
referred to in Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or
public functions. Congress has plenary authority to create government instrumentalities
vested with corporate powers provided these instrumentalities perform essential
government functions or public services. However, when the legislature creates through
special charters corporations that perform economic or commercial activities, such
entities known as "government-owned or controlled corporations" must meet the
test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of
the Philippines and similar government-owned or controlled corporations, which derive
their income to meet operating expenses solely from commercial transactions in
competition with the private sector. The intent of the Constitution is to prevent the
creation of government-owned or controlled corporations that cannot survive on their
own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If a
government corporation loses, then it makes its claim upon the taxpayers' money through
new equity infusions from the government and what is always invoked is the common
good. That is the reason why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been
relocated to agrarian reform, to social services like health and education, to augment the
salaries of grossly underpaid public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they become
viable. And so, Madam President, I reiterate, for the committee's consideration and I am
glad that I am joined in this proposal by Commissioner Foz, the insertion of the standard
of "ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common
good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains
in his textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the
test of economic viability." The addition includes the ideas that they must show capacity
to function efficiently in business and that they should not go into activities which the
private sector can do better. Moreover, economic viability is more than financial viability
but also includes capability to make profit and generate benefits not quantifiable in
financial terms.46 (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to
render essential public services regardless of the economic viability of providing such
service. The non-economic viability of rendering such essential public service does not
excuse the State from withholding such essential services from the public.

However, government-owned or controlled corporations with special charters, organized

essentially for economic or commercial objectives, must meet the test of economic
viability. These are the government-owned or controlled corporations that are usually
organized under their special charters as stock corporations, like the Land Bank of the
Philippines and the Development Bank of the Philippines. These are the governmentowned or controlled corporations, along with government-owned or controlled
corporations organized under the Corporation Code, that fall under the definition of
"government-owned or controlled corporations" in Section 2(10) of the Administrative
Code.
The MIAA need not meet the test of economic viability because the legislature did not
create MIAA to compete in the market place. MIAA does not compete in the market
place because there is no competing international airport operated by the private sector.
MIAA performs an essential public service as the primary domestic and international
airport of the Philippines. The operation of an international airport requires the presence
of personnel from the following government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;
3. The quarantine office of the Department of Health, to enforce health measures against
the spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the entry
of terrorists and the escape of criminals, as well as to secure the airport premises from
terrorist attack or seizure;
6. The Air Traffic Office of the Department of Transportation and Communications, to
authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off
from, the airport; and
7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.
All these agencies of government perform government functions essential to the
operation of an international airport.
MIAA performs an essential public service that every modern State must provide its

citizens. MIAA derives its revenues principally from the mandatory fees and charges
MIAA imposes on passengers and airlines. The terminal fees that MIAA charges every
passenger are regulatory or administrative fees47 and not income from commercial
transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of
the Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure,
MIAA remains a government instrumentality under Section 2(10) of the Introductory
Provisions of the Administrative Code. More importantly, as long as MIAA renders
essential public services, it need not comply with the test of economic viability. Thus,
MIAA is outside the scope of the phrase "government-owned or controlled corporations"
under Section 16, Article XII of the 1987 Constitution.
The minority belittles the use in the Local Government Code of the phrase "governmentowned or controlled corporation" as merely "clarificatory or illustrative." This is fatal.
The 1987 Constitution prescribes explicit conditions for the creation of "governmentowned or controlled corporations." The Administrative Code defines what constitutes a
"government-owned or controlled corporation." To belittle this phrase as "clarificatory or
illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section
2(13) of the Introductory Provisions of the Administrative Code because it is not
organized as a stock or non-stock corporation. Neither is MIAA a government-owned or
controlled corporation under Section 16, Article XII of the 1987 Constitution because
MIAA is not required to meet the test of economic viability. MIAA is a government
instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a
government instrumentality, MIAA is not subject to any kind of tax by local governments
under Section 133(o) of the Local Government Code. The exception to the exemption in
Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the
Local Government Code. Such exception applies only if the beneficial use of real
property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use
and thus are properties of public dominion. Properties of public dominion are owned by
the State or the Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the very least
intended for public service. Whether intended for public use or public service, the Airport
Lands and Buildings are properties of public dominion. As properties of public dominion,
the Airport Lands and Buildings are owned by the Republic and thus exempt from real
estate tax under Section 234(a) of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code,
which governs the legal relation and status of government units, agencies and offices
within the entire government machinery, MIAA is a government instrumentality and not a
government-owned or controlled corporation. Under Section 133(o) of the Local
Government Code, MIAA as a government instrumentality is not a taxable person
because it is not subject to "[t]axes, fees or charges of any kind" by local governments.
The only exception is when MIAA leases its real property to a "taxable person" as
provided in Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the Airport
Lands and Buildings leased to taxable persons like private parties are subject to real
estate tax by the City of Paraaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being
devoted to public use, are properties of public dominion and thus owned by the State or
the Republic of the Philippines. Article 420 specifically mentions "ports x x x constructed
by the State," which includes public airports and seaports, as properties of public
dominion and owned by the Republic. As properties of public dominion owned by the
Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly
exempt from real estate tax under Section 234(a) of the Local Government Code. This
Court has also repeatedly ruled that properties of public dominion are not subject to
execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the
Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878.
We DECLARE the Airport Lands and Buildings of the Manila International Airport
Authority EXEMPT from the real estate tax imposed by the City of Paraaque. We
declare VOID all the real estate tax assessments, including the final notices of real estate
tax delinquencies, issued by the City of Paraaque on the Airport Lands and Buildings of

the Manila International Airport Authority, except for the portions that the Manila
International Airport Authority has leased to private parties. We also declare VOID the
assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila
International Airport Authority.
No costs.
SO ORDERED.
Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, AustriaMartinez, Corona, Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia,
Velasco, Jr., J.J., concur.

x-------------------------------------------------------------------------------x
DISSENTING OPINION
TINGA, J. :
The legally correct resolution of this petition would have had the added benefit of an
utterly fair and equitable result a recognition of the constitutional and statutory power
of the City of Paraaque to impose real property taxes on the Manila International Airport
Authority (MIAA), but at the same time, upholding a statutory limitation that prevents the
City of Paraaque from seizing and conducting an execution sale over the real properties
of MIAA. In the end, all that the City of Paraaque would hold over the MIAA is a
limited lien, unenforceable as it is through the sale or disposition of MIAA properties.
Not only is this the legal effect of all the relevant constitutional and statutory provisions
applied to this case, it also leaves the room for negotiation for a mutually acceptable
resolution between the City of Paraaque and MIAA.
Instead, with blind but measured rage, the majority today veers wildly off-course,
shattering statutes and judicial precedents left and right in order to protect the precious
Ming vase that is the Manila International Airport Authority (MIAA). While the MIAA is
left unscathed, it is surrounded by the wreckage that once was the constitutional policy,
duly enacted into law, that was local autonomy. Make no mistake, the majority has
virtually declared war on the seventy nine (79) provinces, one hundred seventeen (117)
cities, and one thousand five hundred (1,500) municipalities of the Philippines.1
The icing on this inedible cake is the strained and purposely vague rationale used to
justify the majority opinion. Decisions of the Supreme Court are expected to provide
clarity to the parties and to students of jurisprudence, as to what the law of the case is,
especially when the doctrines of long standing are modified or clarified. With all due
respect, the decision in this case is plainly so, so wrong on many levels. More egregious,
in the majority's resolve to spare the Manila International Airport Authority (MIAA) from

liability for real estate taxes, no clear-cut rule emerges on the important question of the
power of local government units (LGUs) to tax government corporations,
instrumentalities or agencies.
The majority would overturn sub silencio, among others, at least one dozen precedents
enumerated below:
1) Mactan-Cebu International Airport Authority v. Hon. Marcos,2 the leading case
penned in 1997 by recently retired Chief Justice Davide, which held that the express
withdrawal by the Local Government Code of previously granted exemptions from realty
taxes applied to instrumentalities and government-owned or controlled corporations
(GOCCs) such as the Mactan-Cebu International Airport Authority (MCIAA). The
majority invokes the ruling in Basco v. Pagcor,3 a precedent discredited in Mactan, and a
vanguard of a doctrine so noxious to the concept of local government rule that the Local
Government Code was drafted precisely to counter such philosophy. The efficacy of
several rulings that expressly rely on Mactan, such as PHILRECA v. DILG Secretary,4
City Government of San Pablo v. Hon. Reyes5 is now put in question.
2) The rulings in National Power Corporation v. City of Cabanatuan,6 wherein the Court,
through Justice Puno, declared that the National Power Corporation, a GOCC, is liable
for franchise taxes under the Local Government Code, and succeeding cases that have
relied on it such as Batangas Power Corp. v. Batangas City7 The majority now states that
deems instrumentalities as defined under the Administrative Code of 1987 as purportedly
beyond the reach of any form of taxation by LGUs, stating "[l]ocal governments are
devoid of power to tax the national government, its agencies and instrumentalities."8
Unfortunately, using the definition employed by the majority, as provided by Section 2(d)
of the Administrative Code, GOCCs are also considered as instrumentalities, thus leading
to the astounding conclusion that GOCCs may not be taxed by LGUs under the Local
Government Code.
3) Lung Center of the Philippines v. Quezon City,9 wherein a unanimous en banc Court
held that the Lung Center of the Philippines may be liable for real property taxes. Using
the majority's reasoning, the Lung Center would be properly classified as an
instrumentality which the majority now holds as exempt from all forms of local
taxation.10
4) City of Davao v. RTC,11 where the Court held that the Government Service Insurance
System (GSIS) was liable for real property taxes for the years 1992 to 1994, its previous
exemption having been withdrawn by the enactment of the Local Government Code.12
This decision, which expressly relied on Mactan, would be directly though silently
overruled by the majority.
5) The common essence of the Court's rulings in the two Philippine Ports Authority v.
City of Iloilo,13 cases penned by Justices Callejo and Azcuna respectively, which relied
in part on Mactan in holding the Philippine Ports Authority (PPA) liable for realty taxes,
notwithstanding the fact that it is a GOCC. Based on the reasoning of the majority, the

PPA cannot be considered a GOCC. The reliance of these cases on Mactan, and its
rationale for holding governmental entities like the PPA liable for local government
taxation is mooted by the majority.
6) The 1963 precedent of Social Security System Employees Association v. Soriano,14
which declared the Social Security Commission (SSC) as a GOCC performing
proprietary functions. Based on the rationale employed by the majority, the Social
Security System is not a GOCC. Or perhaps more accurately, "no longer" a GOCC.
7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit
Authority v. Central Board of Assessment.15 The characterization therein of the Light
Rail Transit Authority (LRTA) as a "service-oriented commercial endeavor" whose
patrimonial property is subject to local taxation is now rendered inconsequential, owing
to the majority's thinking that an entity such as the LRTA is itself exempt from local
government taxation16, irrespective of the functions it performs. Moreover, based on the
majority's criteria, LRTA is not a GOCC.
8) The cases of Teodoro v. National Airports Corporation17 and Civil Aeronautics
Administration v. Court of Appeals.18 wherein the Court held that the predecessor
agency of the MIAA, which was similarly engaged in the operation, administration and
management of the Manila International Agency, was engaged in the exercise of
proprietary, as opposed to sovereign functions. The majority would hold otherwise that
the property maintained by MIAA is actually patrimonial, thus implying that MIAA is
actually engaged in sovereign functions.
9) My own majority in Phividec Industrial Authority v. Capitol Steel,19 wherein the
Court held that the Phividec Industrial Authority, a GOCC, was required to secure the
services of the Office of the Government Corporate Counsel for legal representation.20
Based on the reasoning of the majority, Phividec would not be a GOCC, and the mandate
of the Office of the Government Corporate Counsel extends only to GOCCs.
10) Two decisions promulgated by the Court just last month (June 2006), National Power
Corporation v. Province of Isabela21 and GSIS v. City Assessor of Iloilo City.22 In the
former, the Court pronounced that "[a]lthough as a general rule, LGUs cannot impose
taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, this rule admits of an exception, i.e., when specific provisions of the
LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned
entities." Yet the majority now rules that the exceptions in the LGC no longer hold, since
"local governments are devoid of power to tax the national government, its agencies and
instrumentalities."23 The ruling in the latter case, which held the GSIS as liable for real
property taxes, is now put in jeopardy by the majority's ruling.
There are certainly many other precedents affected, perhaps all previous jurisprudence
regarding local government taxation vis-a-vis government entities, as well as any
previous definitions of GOCCs, and previous distinctions between the exercise of
governmental and proprietary functions (a distinction laid down by this Court as far back

as 191624). What is the reason offered by the majority for overturning or modifying all
these precedents and doctrines? None is given, for the majority takes comfort instead in
the pretense that these precedents never existed. Only children should be permitted to
subscribe to the theory that something bad will go away if you pretend hard enough that it
does not exist.
I.
Case Should Have Been Decided
Following Mactan Precedent
The core issue in this case, whether the MIAA is liable to the City of Paraaque for real
property taxes under the Local Government Code, has already been decided by this Court
in the Mactan case, and should have been resolved by simply applying precedent.
Mactan Explained
A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport
Authority (MCIAA) claimed that it was exempt from payment of real property taxes to
the City of Cebu, invoking the specific exemption granted in Section 14 of its charter,
Republic Act No. 6958, and its status as an instrumentality of the government performing
governmental functions.25 Particularly, MCIAA invoked Section 133 of the Local
Government Code, precisely the same provision utilized by the majority as the basis for
MIAA's exemption. Section 133 reads:
Sec. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. (emphasis and underscoring supplied).
However, the Court in Mactan noted that Section 133 qualified the exemption of the
National Government, its agencies and instrumentalities from local taxation with the
phrase "unless otherwise provided herein." It then considered the other relevant
provisions of the Local Government Code, particularly the following:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemption or incentives granted to, or enjoyed by all persons, whether natural
or juridical, including government-owned and controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code.26

SECTION 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila area may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvements not hereafter specifically
exempted.27
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person:
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned and controlled corporations engaged in the
distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all
government-owned or controlled corporations are hereby withdrawn upon the effectivity
of this Code.28
Clearly, Section 133 was not intended to be so absolute a prohibition on the power of
LGUs to tax the National Government, its agencies and instrumentalities, as evidenced by
these cited provisions which "otherwise provided." But what was the extent of the
limitation under Section 133? This is how the Court, correctly to my mind, defined the
parameters in Mactan:
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of
local government units and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use of exceptions or provisos in these
sections, as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in Section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead of the
clause "unless otherwise provided herein," with the "herein" to mean, of course, the
section, it should have used the clause "unless otherwise provided in this Code." The
former results in absurdity since the section itself enumerates what are beyond the taxing
powers of local government units and, where exceptions were intended, the exceptions
are explicitly indicated in the next. For instance, in item (a) which excepts income taxes
"when levied on banks and other financial institutions"; item (d) which excepts "wharfage
on wharves constructed and maintained by the local government unit concerned"; and
item (1) which excepts taxes, fees and charges for the registration and issuance of
licenses or permits for the driving of "tricycles." It may also be observed that within the
body itself of the section, there are exceptions which can be found only in other parts of
the LGC, but the section interchangeably uses therein the clause, "except as otherwise
provided herein" as in items (c) and (i), or the clause "except as provided in this Code" in
item (j). These clauses would be obviously unnecessary or mere surplusages if the
opening clause of the section were "Unless otherwise provided in this Code" instead of
"Unless otherwise provided herein." In any event, even if the latter is used, since under
Section 232 local government units have the power to levy real property tax, except those
exempted therefrom under Section 234, then Section 232 must be deemed to qualify
Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in Section 133, the taxing powers of local government units
cannot extend to the levy of, inter alia, "taxes, fees and charges of any kind on the
National Government, its agencies and instrumentalities, and local government units";
however, pursuant to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter alia, "real
property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise,
to a taxable person," as provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or judicial
persons, including government-owned and controlled corporations, Section 193 of the
LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the
LGC, except those granted to local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, and
unless otherwise provided in the LGC. The latter proviso could refer to Section 234
which enumerates the properties exempt from real property tax. But the last paragraph of
Section 234 further qualifies the retention of the exemption insofar as real property taxes
are concerned by limiting the retention only to those enumerated therein; all others not
included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover,
even as to real property owned by the Republic of the Philippines or any of its political

subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a taxable person for
consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of
the LGC, exemptions from payment of real property taxes granted to natural or juridical
persons, including government-owned or controlled corporations, except as provided in
the said section, and the petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in Section 14 of its
Charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be
justified if the petitioner can seek refuge under any of the exceptions provided in Section
234, but not under Section 133, as it now asserts, since, as shown above, the said section
is qualified by Sections 232 and 234.29
The Court in Mactan acknowledged that under Section 133, instrumentalities were
generally exempt from all forms of local government taxation, unless otherwise provided
in the Code. On the other hand, Section 232 "otherwise provided" insofar as it allowed
LGUs to levy an ad valorem real property tax, irrespective of who owned the property. At
the same time, the imposition of real property taxes under Section 232 is in turn qualified
by the phrase "not hereinafter specifically exempted." The exemptions from real property
taxes are enumerated in Section 234, which specifically states that only real properties
owned "by the Republic of the Philippines or any of its political subdivisions" are
exempted from the payment of the tax. Clearly, instrumentalities or GOCCs do not fall
within the exceptions under Section 234.30
Mactan Overturned the
Precedents Now Relied
Upon by the Majority
But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR,31
decided before the enactment of the Local Government Code. The Court in Basco
declared the PAGCOR as exempt from local taxes, justifying the exemption in this wise:
Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original charter, PD
1869. All of its shares of stocks are owned by the National Government. In addition to its
corporate powers (Sec. 3, Title II, PD 1869) it also exercises regulatory powers xxx
PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded
or subjected to control by a mere Local government.

"The states have no power by taxation or otherwise, to retard impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government." (McCulloch v. Marland, 4 Wheat
316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in such
a way as to prevent it from consummating its federal responsibilities, or even to seriously
burden it in the accomplishment of them." (Antieau, Modern Constitutional Law, Vol. 2,
p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activates or enterprise using the
power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it.32
Basco is as strident a reiteration of the old guard view that frowned on the principle of
local autonomy, especially as it interfered with the prerogatives and privileges of the
national government. Also consider the following citation from Maceda v. Macaraig,33
decided the same year as Basco. Discussing the rule of construction of tax exemptions on
government instrumentalities, the sentiments are of a similar vein.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply
in the case of exemptions in favor of a government political subdivision or
instrumentality.
The basis for applying the rule of strict construction to statutory provisions granting tax
exemptions or deductions, even more obvious than with reference to the affirmative or
levying provisions of tax statutes, is to minimize differential treatment and foster
impartiality, fairness, and equality of treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of
the government itself or its agencies. In such case the practical effect of an exemption is
merely to reduce the amount of money that has to be handled by government in the
course of its operations. For these reasons, provisions granting exemptions to government
agencies may be construed liberally, in favor of non tax-liability of such agencies.
In the case of property owned by the state or a city or other public corporations, the

express exemption should not be construed with the same degree of strictness that applies
to exemptions contrary to the policy of the state, since as to such property "exemption is
the rule and taxation the exception."34
Strikingly, the majority cites these two very cases and the stodgy rationale provided
therein. This evinces the perspective from which the majority is coming from. It is
admittedly a viewpoint once shared by this Court, and en vogue prior to the enactment of
the Local Government Code of 1991.
However, the Local Government Code of 1991 ushered in a new ethos on how the art of
governance should be practiced in the Philippines, conceding greater powers once held in
the private reserve of the national government to LGUs. The majority might have private
qualms about the wisdom of the policy of local autonomy, but the members of the Court
are not expected to substitute their personal biases for the legislative will, especially
when the 1987 Constitution itself promotes the principle of local autonomy.
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
Section 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system
of decentralization with effective mechanisms of recall, initiative, and referendum,
allocate among the different local government units their powers, responsibilities, and
resources, and provide for the qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials, and all other matters relating
to the organization and operation of the local units.
xxx
Section 5. Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments.
xxx
The Court in Mactan recognized that a new day had dawned with the enactment of the

1987 Constitution and the Local Government Code of 1991. Thus, it expressly rejected
the contention of the MCIAA that Basco was applicable to them. In doing so, the
language of the Court was dramatic, if only to emphasize how monumental the shift in
philosophy was with the enactment of the Local Government Code:
Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v.
Philippine Amusement and Gaming Corporation is unavailing since it was decided before
the effectivity of the [Local Government Code]. Besides, nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the Government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom.35 (emphasis
supplied)
The Court Has Repeatedly
Reaffirmed Mactan Over the
Precedents Now Relied Upon
By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco doctrine
as dead. The notion that instrumentalities may be subjected to local taxation by LGUs
was again affirmed in National Power Corporation v. City of Cabanatuan,36 which was
penned by Justice Puno. NPC or Napocor, invoking its continued exemption from
payment of franchise taxes to the City of Cabanatuan, alleged that it was an
instrumentality of the National Government which could not be taxed by a city
government. To that end, Basco was cited by NPC. The Court had this to say about
Basco.
xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation relied
upon by the petitioner to support its claim no longer applies. To emphasize, the Basco
case was decided prior to the effectivity of the LGC, when no law empowering the local
government units to tax instrumentalities of the National Government was in effect.
However, as this Court ruled in the case of Mactan Cebu International Airport Authority
(MCIAA) vs. Marcos, nothing prevents Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may
be subject to tax. In enacting the LGC, Congress exercised its prerogative to tax
instrumentalities and agencies of government as it sees fit. Thus, after reviewing the
specific provisions of the LGC, this Court held that MCIAA, although an instrumentality
of the national government, was subject to real property tax.37
In the 2003 case of Philippine Ports Authority v. City of Iloilo,38 the Court, in the able
ponencia of Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the
taxes were assessed under the old Real Property Tax Code and not the Local Government
Code, the Court again cited Mactan to refute PPA's invocation of Basco as the basis of its

exemption.
[Basco] did not absolutely prohibit local governments from taxing government
instrumentalities. In fact we stated therein:
The power of local government to "impose taxes and fees" is always subject to
"limitations" which Congress may provide by law. Since P.D. 1869 remains an
"operative" law until "amended, repealed or revoked". . . its "exemption clause" remains
an exemption to the exercise of the power of local governments to impose taxes and fees.
Furthermore, in the more recent case of Mactan Cebu International Airport Authority v.
Marcos, where the Basco case was similarly invoked for tax exemption, we stated:
"[N]othing can prevent Congress from decreeing that even instrumentalities or agencies
of the Government performing governmental functions may be subject to tax. Where it is
done precisely to fulfill a constitutional mandate and national policy, no one can doubt its
wisdom." The fact that tax exemptions of government-owned or controlled corporations
have been expressly withdrawn by the present Local Government Code clearly attests
against petitioner's claim of absolute exemption of government instrumentalities from
local taxation.39
Just last month, the Court in National Power Corporation v. Province of Isabela40 again
rejected Basco in emphatic terms. Held the Court, through Justice Callejo, Sr.:
Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case,
the Court noted primarily that the Basco case was decided prior to the effectivity of the
LGC, when no law empowering the local government units to tax instrumentalities of the
National Government was in effect. It further explained that in enacting the LGC,
Congress empowered the LGUs to impose certain taxes even on instrumentalities of the
National Government.41
The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of
Iloilo42 case, a decision also penned by Justice Callejo, Sr., wherein the Court affirmed
the sale of PPA's properties at public auction for failure to pay realty taxes. The Court
again reiterated that "it was the intention of Congress to withdraw the tax exemptions
granted to or presently enjoyed by all persons, including government-owned or controlled
corporations, upon the effectivity" of the Code.43 The Court in the second Public Ports
Authority case likewise cited Mactan as providing the "raison d'etre for the withdrawal of
the exemption," namely, "the State policy to ensure autonomy to local governments and
the objective of the [Local Government Code] that they enjoy genuine and meaningful
local autonomy to enable them to attain their fullest development as self-reliant
communities. . . . "44
Last year, the Court, in City of Davao v. RTC,45 affirmed that the legislated exemption
from real property taxes of the Government Service Insurance System (GSIS) was
removed under the Local Government Code. Again, Mactan was relied upon as the
governing precedent. The removal of the tax exemption stood even though the then GSIS

law46 prohibited the removal of GSIS' tax exemptions unless the exemption was
specifically repealed, "and a provision is enacted to substitute the declared policy of
exemption from any and all taxes as an essential factor for the solvency of the fund."47
The Court, citing established doctrines in statutory construction and Duarte v. Dade48
ruled that such proscription on future legislation was itself prohibited, as "the legislature
cannot bind a future legislature to a particular mode of repeal."49
And most recently, just less than one month ago, the Court, through Justice Corona in
Government Service Insurance System v. City Assessor of Iloilo50 again affirmed that
the Local Government Code removed the previous exemption from real property taxes of
the GSIS. Again Mactan was cited as having "expressly withdrawn the [tax] exemption of
the [GOCC].51
Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential
rule employed by the Court since its adoption, the doctrine therein consistent with the
Local Government Code. Corollarily, Basco, the polar opposite of Mactan has been
emphatically rejected and declared inconsistent with the Local Government Code.
II.
Majority, in Effectively Overturning Mactan,
Refuses to Say Why Mactan Is Wrong
The majority cites Basco in support. It does not cite Mactan, other than an incidental
reference that it is relied upon by the respondents.52 However, the ineluctable conclusion
is that the majority rejects the rationale and ruling in Mactan. The majority provides for a
wildly different interpretation of Section 133, 193 and 234 of the Local Government
Code than that employed by the Court in Mactan. Moreover, the parties in Mactan and in
this case are similarly situated, as can be obviously deducted from the fact that both
petitioners are airport authorities operating under similarly worded charters. And the fact
that the majority cites doctrines contrapuntal to the Local Government Code as in Basco
and Maceda evinces an intent to go against the Court's jurisprudential trend adopting the
philosophy of expanded local government rule under the Local Government Code.
Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated
on the majority's studied murkiness vis--vis the Mactan precedent. The majority is
obviously inconsistent with Mactan and there is no way these two rulings can stand
together. Following basic principles in statutory construction, Mactan will be deemed as
giving way to this new ruling.
However, the majority does not bother to explain why Mactan is wrong. The
interpretation in Mactan of the relevant provisions of the Local Government Code is
elegant and rational, yet the majority refuses to explain why this reasoning of the Court in
Mactan is erroneous. In fact, the majority does not even engage Mactan in any
meaningful way. If the majority believes that Mactan may still stand despite this ruling, it

remains silent as to the viable distinctions between these two cases.

The majority's silence on Mactan is baffling, considering how different this new ruling is
with the ostensible precedent. Perhaps the majority does not simply know how to
dispense with the ruling in Mactan. If Mactan truly deserves to be discarded as precedent,
it deserves a more honorable end than death by amnesia or ignonominous disregard. The
majority could have devoted its discussion in explaining why it thinks Mactan is wrong,
instead of pretending that Mactan never existed at all. Such an approach might not have
won the votes of the minority, but at least it would provide some degree of intellectual
clarity for the parties, LGUs and the national government, students of jurisprudence and
practitioners. A more meaningful debate on the matter would have been possible,
enriching the study of law and the intellectual dynamic of this Court.
There is no way the majority can be justified unless Mactan is overturned. The MCIAA
and the MIAA are similarly situated. They are both, as will be demonstrated, GOCCs,
commonly engaged in the business of operating an airport. They are the owners of airport
properties they respectively maintain and hold title over these properties in their name.53
These entities are both owned by the State, and denied by their respective charters the
absolute right to dispose of their properties without prior approval elsewhere.54 Both of
them are
not empowered to obtain loans or encumber their properties without prior approval the
prior approval of the President.55
III.
Instrumentalities, Agencies
And GOCCs Generally
Liable for Real Property Tax
I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of
my position lies with Mactan, which will further demonstrate why the majority has found
it inconvenient to even grapple with the precedent that is Mactan in the first place.
Mactan held that the prohibition on taxing the national government, its agencies and
instrumentalities under Section 133 is qualified by Section 232 and Section 234, and
accordingly, the only relevant exemption now applicable to these bodies is as provided
under Section 234(o), or on "real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person."
It should be noted that the express withdrawal of previously granted exemptions by the
Local Government Code do not even make any distinction as to whether the exempt
person is a governmental entity or not. As Sections 193 and 234 both state, the

withdrawal applies to "all persons, including [GOCCs]", thus encompassing the two
classes of persons recognized under our laws, natural persons56 and juridical persons.57
The fact that the Local Government Code mandates the withdrawal of previously granted
exemptions evinces certain key points. If an entity was previously granted an express
exemption from real property taxes in the first place, the obvious conclusion would be
that such entity would ordinarily be liable for such taxes without the exemption. If such
entities were already deemed exempt due to some overarching principle of law, then it
would be a redundancy or surplusage to grant an exemption to an already exempt entity.
This fact militates against the claim that MIAA is preternaturally exempt from realty
taxes, since it required the enactment of an express exemption from such taxes in its
charter.
Amazingly, the majority all but ignores the disquisition in Mactan and asserts that
government instrumentalities are not taxable persons unless they lease their properties to
a taxable person. The general rule laid down in Section 232 is given short shrift. In
arriving at this conclusion, several leaps in reasoning are committed.
Majority's Flawed Definition
of GOCCs.
The majority takes pains to assert that the MIAA is not a GOCC, but rather an
instrumentality. However, and quite grievously, the supposed foundation of this assertion
is an adulteration.
The majority gives the impression that a government instrumentality is a distinct concept
from a government corporation.58 Most tellingly, the majority selectively cites a portion
of Section 2(10) of the Administrative Code of 1987, as follows:
Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. xxx59 (emphasis omitted)
However, Section 2(10) of the Administrative Code, when read in full, makes an
important clarification which the majority does not show. The portions omitted by the
majority are highlighted below:
(10)Instrumentality refers to any agency of the National Government not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and governmentowned or controlled corporations.60
Since Section 2(10) makes reference to "agency of the National Government," Section

2(4) is also worth citing in full:

(4) Agency of the Government refers to any of the various units of the Government,
including a department, bureau, office, instrumentality, or government-owned or
controlled corporation, or a local government or a distinct unit therein. (emphasis
supplied)61
Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an
agency of the National Government. Thus, there actually is no point in the majority's
assertion that MIAA is not a GOCC, since based on the majority's premise of Section 133
as the key provision, the material question is whether MIAA is either an instrumentality,
an agency, or the National Government itself. The very provisions of the Administrative
Code provide that a GOCC can be either an instrumentality or an agency, so why even
bother to extensively discuss whether or not MIAA is a GOCC?
Indeed as far back as the 1927 case of Government of the Philippine Islands v.
Springer,62 the Supreme Court already noted that a corporation of which the government
is the majority stockholder "remains an agency or instrumentality of government."63
Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little
rebuttal. However, the entire discussion of the majority on the definition of a GOCC,
obiter as it may ultimately be, deserves emphatic refutation. The views of the majority on
this matter are very dangerous, and would lead to absurdities, perhaps unforeseen by the
majority. For in fact, the majority effectively declassifies many entities created and
recognized as GOCCs and would give primacy to the Administrative Code of 1987 rather
than their respective charters as to the definition of these entities.
Majority Ignores the Power
Of Congress to Legislate and
Define Chartered Corporations
First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC
must be "organized as a stock or non-stock corporation," as defined under the
Corporation Code. To insist on this as an absolute rule fails on bare theory. Congress has
the undeniable power to create a corporation by legislative charter, and has been doing so
throughout legislative history. There is no constitutional prohibition on Congress as to
what structure these chartered corporations should take on. Clearly, Congress has the
prerogative to create a corporation in whatever form it chooses, and it is not bound by any
traditional format. Even if there is a definition of what a corporation is under the
Corporation Code or the Administrative Code, these laws are by no means sacrosanct. It
should be remembered that these two statutes fall within the same level of hierarchy as a
congressional charter, since they all are legislative enactments. Certainly, Congress can
choose to disregard either the Corporation Code or the Administrative Code in defining
the corporate structure of a GOCC, utilizing the same extent of legislative powers

similarly vesting it the putative ability to amend or abolish the Corporation Code or the
Administrative Code.
These principles are actually recognized by both the Administrative Code and the
Corporation Code. The definition of GOCCs, agencies and instrumentalities under the
Administrative Code are laid down in the section entitled "General Terms Defined,"
which qualifies:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning: (emphasis supplied)
xxx
Similar in vein is Section 6 of the Corporation Code which provides:
SEC. 4. Corporations created by special laws or charters. Corporations created by
special laws or charters shall be governed primarily by the provisions of the special law
or charter creating them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable. (emphasis supplied)
Thus, the clear doctrine emerges the law that governs the definition of a corporation or
entity created by Congress is its legislative charter. If the legislative enactment defines an
entity as a corporation, then it is a corporation, no matter if the Corporation Code or the
Administrative Code seemingly provides otherwise. In case of conflict between the
legislative charter of a government corporation, on one hand, and the Corporate Code and
the Administrative Code, on the other, the former always prevails.
Majority, in Ignoring the
Legislative Charters, Effectively
Classifies Duly Established GOCCs,
With Disastrous and Far Reaching
Legal Consequences
Second, the majority claims that MIAA does not qualify either as a stock or non-stock
corporation, as defined under the Corporation Code. It explains that the MIAA is not a
stock corporation because it does not have any capital stock divided into shares. Neither
can it be considered as a non-stock corporation because it has no members, and under
Section 87, a non-stock corporation is one where no part of its income is distributable as
dividends to its members, trustees or officers.
This formulation of course ignores Section 4 of the Corporation Code, which again
provides that corporations created by special laws or charters shall be governed primarily

by the provisions of the special law or charter, and not the Corporation Code.
That the MIAA cannot be considered a stock corporation if only because it does not have
a stock structure is hardly a plausible proposition. Indeed, there is no point in requiring a
capital stock structure for GOCCs whose full ownership is limited by its charter to the
State or Republic. Such GOCCs are not empowered to declare dividends or alienate their
capital shares.
Admittedly, there are GOCCs established in such a manner, such as the National Power
Corporation (NPC), which is provided with authorized capital stock wholly subscribed
and paid for by the Government of the Philippines, divided into shares but at the same
time, is prohibited from transferring, negotiating, pledging, mortgaging or otherwise
giving these shares as security for payment of any obligation.64 However, based on the
Corporation Code definition relied upon by the majority, even the NPC cannot be
considered as a stock corporation. Under Section 3 of the Corporation Code, stock
corporations are defined as being "authorized to distribute to the holders of its shares
dividends or allotments of the surplus profits on the basis of the shares held."65 On the
other hand, Section 13 of the NPC's charter states that "the Corporation shall be nonprofit and shall devote all its returns from its capital investment, as well as excess
revenues from its operation, for expansion."66 Can the holder of the shares of NPC, the
National Government, receive its surplus profits on the basis of its shares held? It cannot,
according to the NPC charter, and hence, following Section 3 of the Corporation Code,
the NPC is not a stock corporation, if the majority is to be believed.
The majority likewise claims that corporations without members cannot be deemed nonstock corporations. This would seemingly exclude entities such as the NPC, which like
MIAA, has no ostensible members. Moreover, non-stock corporations cannot distribute
any part of its income as dividends to its members, trustees or officers. The majority
faults MIAA for remitting 20% of its gross operating income to the national government.
How about the Philippine Health Insurance Corporation, created with the "status of a taxexempt government corporation attached to the Department of Health" under Rep. Act
No. 7875.67 It too cannot be considered as a stock corporation because it has no capital
stock structure. But using the criteria of the majority, it is doubtful if it would pass muster
as a non-stock corporation, since the PHIC or Philhealth, as it is commonly known, is
expressly empowered "to collect, deposit, invest, administer and disburse" the National
Health Insurance Fund.68 Or how about the Social Security System, which under its
revised charter, Republic Act No. 8282, is denominated as a "corporate body."69 The SSS
has no capital stock structure, but has capital comprised of contributions by its members,
which are eventually remitted back to its members. Does this disqualify the SSS from
classification as a GOCC, notwithstanding this Court's previous pronouncement in Social
Security System Employees Association v. Soriano?70
In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock
or non-stock,71 declare and remit at least fifty percent (50%) of their annual net earnings
as cash, stock or property dividends to the National Government.72 But according to the
majority, non-stock corporations are prohibited from declaring any part of its income as

dividends. But if Republic Act No. 7656 requires even non-stock corporations to declare
dividends from income, should it not follow that the prohibition against declaration of
dividends by non-stock corporations under the Corporation Code does not apply to
government-owned or controlled corporations? For if not, and the majority's illogic is
pursued, Republic Act No. 7656, passed in 1993, would be fatally flawed, as it would
contravene the Administrative Code of 1987 and the Corporation Code.
In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be
illustrated by Republic Act No. 7656. Following the majority's definition of a GOCC and
in accordance with Republic Act No. 7656, here are but a few entities which are not
obliged to remit fifty (50%) of its annual net earnings to the National Government as they
are excluded from the scope of Republic Act No. 7656:
1) Philippine Ports Authority73 has no capital stock74, no members, and obliged to
apply the balance of its income or revenue at the end of each year in a general reserve.75
2) Bases Conversion Development Authority76 - has no capital stock,77 no members.
3) Philippine Economic Zone Authority78 - no capital stock,79 no members.
4) Light Rail Transit Authority80 - no capital stock,81 no members.
5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to remit fifty
percent (50%) of its net profits to the National Treasury.84
6) National Power Corporation85 - has capital stock but is prohibited from "distributing
to the holders of its shares dividends or allotments of the surplus profits on the basis of
the shares held;"86 no members.
7) Manila International Airport Authority no capital stock87, no members88, mandated
to remit twenty percent (20%) of its annual gross operating income to the National
Treasury.89
Thus, for the majority, the MIAA, among many others, cannot be considered as within
the coverage of Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed.
How else then could Executive Order No. 483, signed in 1998 by President Ramos, be
explained? The issuance provides:
WHEREAS, Section 1 of Republic Act No. 7656 provides that:
"Section 1. Declaration of Policy. - It is hereby declared the policy of the State that in
order for the National Government to realize additional revenues, government-owned
and/or controlled corporations, without impairing their viability and the purposes for
which they have been established, shall share a substantial amount of their net earnings to
the National Government."

WHEREAS, to support the viability and mandate of government-owned and/or controlled

corporations [GOCCs], the liquidity, retained earnings position and medium-term plans
and programs of these GOCCs were considered in the determination of the reasonable
dividend rates of such corporations on their 1997 net earnings.
WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended
the adjustment on the percentage of annual net earnings that shall be declared by the
Manila International Airport Authority [MIAA] and Phividec Industrial Authority [PIA]
in the interest of national economy and general welfare.
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the
powers vested in me by law, do hereby order:
SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA
and PIA as dividends to the National Government as provided for under Section 3 of
Republic Act No. 7656 is adjusted from at least fifty percent [50%] to the rates specified
hereunder:
1. Manila International Airport Authority - 35% [cash]
2. Phividec Industrial Authority - 25% [cash]
SECTION 2. The adjusted dividend rates provided for under Section 1 are only
applicable on 1997 net earnings of the concerned government-owned and/or controlled
corporations.
Obviously, it was the opinion of President Ramos and the Secretary of Finance that
MIAA is a GOCC, for how else could it have come under the coverage of Republic Act
No. 7656, a law applicable only to GOCCs? But, the majority apparently disagrees, and
resultantly holds that MIAA is not obliged to remit even the reduced rate of thirty five
percent (35%) of its net earnings to the national government, since it cannot be covered
by Republic Act No. 7656.
All this mischief because the majority would declare the Administrative Code of 1987
and the Corporation Code as the sole sources of law defining what a government
corporation is. As I stated earlier, I find it illogical that chartered corporations are
compelled to comply with the templates of the Corporation Code, especially when the
Corporation Code itself states that these corporations are to be governed by their own
charters. This is especially true considering that the very provision cited by the majority,
Section 87 of the Corporation Code, expressly says that the definition provided therein is
laid down "for the purposes of this [Corporation] Code." Read in conjunction with
Section 4 of the Corporation Code which mandates that corporations created by charter
be governed by the law creating them, it is clear that contrary to the majority, MIAA is
not disqualified from classification as a non-stock corporation by reason of Section 87,
the provision not being applicable to corporations created by special laws or charters. In
fact, I see no real impediment why the MIAA and similarly situated corporations such as

the PHIC, the SSS, the Philippine Deposit Insurance Commission, or maybe even the
NPC could at the very least, be deemed as no stock corporations (as differentiated from
non-stock corporations).
The point, stripped to bare simplicity, is that entity created by legislative enactment is a
corporation if the legislature says so. After all, it is the legislature that dictates what a
corporation is in the first place. This is better illustrated by another set of entities created
before martial law. These include the Mindanao Development Authority,90 the Northern
Samar Development Authority,91 the Ilocos Sur Development Authority,92 the
Southeastern Samar Development Authority93 and the Mountain Province Development
Authority.94 An examination of the first section of the statutes creating these entities
reveal that they were established "to foster accelerated and balanced growth" of their
respective regions, and towards such end, the charters commonly provide that "it is
recognized that a government corporation should be created for the purpose," and
accordingly, these charters "hereby created a body corporate."95 However, these
corporations do not have capital stock nor members, and are obliged to return the
unexpended balances of their appropriations and earnings to a revolving fund in the
National Treasury. The majority effectively declassifies these entities as GOCCs, never
mind the fact that their very charters declare them to be GOCCs.
I mention these entities not to bring an element of obscurantism into the fray. I cite them
as examples to emphasize my fundamental pointthat it is the legislative charters of
these entities, and not the Administrative Code, which define the class of personality of
these entities created by Congress. To adopt the view of the majority would be, in effect,
to sanction an implied repeal of numerous congressional charters for the purpose of
declassifying GOCCs. Certainly, this could not have been the intent of the crafters of the
Administrative Code when they drafted the "Definition of Terms" incorporated therein.
MIAA Is Without
Doubt, A GOCC
Following the charters of government corporations, there are two kinds of GOCCs,
namely: GOCCs which are stock corporations and GOCCs which are no stock
corporations (as distinguished from non-stock corporation). Stock GOCCs are simply
those which have capital stock while no stock GOCCs are those which have no capital
stock. Obviously these definitions are different from the definitions of the terms in the
Corporation Code. Verily, GOCCs which are not incorporated with the Securities and
Exchange Commission are not governed by the Corporation Code but by their respective
charters.
For the MIAA's part, its charter is replete with provisions that indubitably classify it as a
GOCC. Observe the following provisions from MIAA's charter:
SECTION 3. Creation of the Manila International Airport Authority.There is hereby
established a body corporate to be known as the Manila International Airport Authority

which shall be attached to the Ministry of Transportation and Communications. The

principal office of the Authority shall be located at the New Manila International Airport.
The Authority may establish such offices, branches, agencies or subsidiaries as it may
deem proper and necessary; Provided, That any subsidiary that may be organized shall
have the prior approval of the President.
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The
Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive
Order and the corresponding title to be issued in the name of the Authority. Any portion
thereof shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines.
xxx
SECTION 5. Functions, Powers, and Duties. The Authority shall have the following
functions, powers and duties:
xxx
(d) To sue and be sued in its corporate name;
(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend or repeal the same from time to time;
(h) To execute or enter into contracts of any kind or nature;
(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of
any land, building, airport facility, or property of whatever kind and nature, whether
movable or immovable, or any interest therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;
xxx
(o) To exercise all the powers of a corporation under the Corporation Law, insofar as
these powers are not inconsistent with the provisions of this Executive Order.
xxx
SECTION 16. Borrowing Power. The Authority may, after consultation with the

Minister of Finance and with the approval of the President of the Philippines, as
recommended by the Minister of Transportation and Communications, raise funds, either
from local or international sources, by way of loans, credits or securities, and other
borrowing instruments, with the power to create pledges, mortgages and other voluntary
liens or encumbrances on any of its assets or properties.
All loans contracted by the Authority under this Section, together with all interests and
other sums payable in respect thereof, shall constitute a charge upon all the revenues and
assets of the Authority and shall rank equally with one another, but shall have priority
over any other claim or charge on the revenue and assets of the Authority: Provided, That
this provision shall not be construed as a prohibition or restriction on the power of the
Authority to create pledges, mortgages, and other voluntary liens or encumbrances on any
assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total outstanding
indebtedness of the Authority in the principal amount, in local and foreign currency, shall
not at any time exceed the net worth of the Authority at any given time.
xxx
The President or his duly authorized representative after consultation with the Minister of
Finance may guarantee, in the name and on behalf of the Republic of the Philippines, the
payment of the loans or other indebtedness of the Authority up to the amount herein
authorized.
These cited provisions establish the fitness of MIAA to be the subject of legal relations.96
MIAA under its charter may acquire and possess property, incur obligations, and bring
civil or criminal actions. It has the power to contract in its own name, and to acquire title
to real or personal property. It likewise may exercise a panoply of corporate powers and
possesses all the trappings of corporate personality, such as a corporate name, a corporate
seal and by-laws. All these are contained in MIAA's charter which, as conceded by the
Corporation Code and even the Administrative Code, is the primary law that governs the
definition and organization of the MIAA.
In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in
the very first paragraph of the present petition before this Court.97 So does, apparently,
the Department of Budget and Management, which classifies MIAA as a "government
owned & controlled corporation" on its internet website.98 There is also the matter of
Executive Order No. 483, which evinces the belief of the then-president of the
Philippines that MIAA is a GOCC. And the Court before had similarly characterized
MIAA as a government-owned and controlled corporation in the earlier MIAA case,
Manila International Airport Authority v. Commission on Audit.99
Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it
is because MIAA is actually an instrumentality. But the very definition relied upon by the
majority of an instrumentality under the Administrative Code clearly states that a GOCC

is likewise an instrumentality or an agency. The question of whether MIAA is a GOCC

might not even be determinative of this Petition, but the effect of the majority's
disquisition on that matter may even be more destructive than the ruling that MIAA is
exempt from realty taxes. Is the majority ready to live up to the momentous consequences
of its flawed reasoning?
Novel Proviso in 1987 Constitution
Prescribing Standards in the
Creation of GOCCs Necessarily
Applies only to GOCCs Created
After 1987.
One last point on this matter on whether MIAA is a GOCC. The majority triumphantly
points to Section 16, Article XII of the 1987 Constitution, which mandates that the
creation of GOCCs through special charters be "in the interest of the common good and
subject to the test of economic viability." For the majority, the test of economic viability
does not apply to government entities vested with corporate powers and performing
essential public services. But this test of "economic viability" is new to the constitutional
framework. No such test was imposed in previous Constitutions, including the 1973
Constitution which was the fundamental law in force when the MIAA was created. How
then could the MIAA, or any GOCC created before 1987 be expected to meet this new
precondition to the creation of a GOCC? Does the dissent seriously suggest that GOCCs
created before 1987 may be declassified on account of their failure to meet this
"economic viability test"?
Instrumentalities and Agencies
Also Generally Liable For
Real Property Taxes
Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC,
then argues that MIAA is an instrumentality. It cites incompletely, as earlier stated, the
provision of Section 2(10) of the Administrative Code. A more convincing view offered
during deliberations, but which was not adopted by the ponencia, argued that MIAA is
not an instrumentality but an agency, considering the fact that under the Administrative
Code, the MIAA is attached within the department framework of the Department of
Transportation and Communications.100 Interestingly, Executive Order No. 341, enacted
by President Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities are
expressly defined as "an agency not integrated within the department framework," that
view concluded that MIAA cannot be deemed an instrumentality.

Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the

Administrative Code considers GOCCs as agencies,101 so the fact that MIAA is an
agency does not exclude it from classification as a GOCC. On the other hand, the
majority justifies MIAA's purported exemption on Section 133 of the Local Government
Code, which similarly situates "agencies and instrumentalities" as generally exempt from
the taxation powers of LGUs. And on this point, the majority again evades Mactan and
somehow concludes that Section 133 is the general rule, notwithstanding Sections 232
and 234(a) of the Local Government Code. And the majority's ultimate conclusion? "By
express mandate of the Local Government Code, local governments cannot impose any
kind of tax on national government instrumentalities like the MIAA. Local governments
are devoid of power to tax the national government, its agencies and
instrumentalities."102
The Court's interpretation of the Local Government Code in Mactan renders the law
integrally harmonious and gives due accord to the respective prerogatives of the national
government and LGUs. Sections 133 and 234(a) ensure that the Republic of the
Philippines or its political subdivisions shall not be subjected to any form of local
government taxation, except realty taxes if the beneficial use of the property owned has
been granted for consideration to a taxable entity or person. On the other hand, Section
133 likewise assures that government instrumentalities such as GOCCs may not be
arbitrarily taxed by LGUs, since they could be subjected to local taxation if there is a
specific proviso thereon in the Code. One such proviso is Section 137, which as the Court
found in National Power Corporation,103 permits the imposition of a franchise tax on
businesses enjoying a franchise, even if it be a GOCC such as NPC. And, as the Court
acknowledged in Mactan, Section 232 provides another exception on the taxability of
instrumentalities.
The majority abjectly refuses to engage Section 232 of the Local Government Code
although it provides the indubitable general rule that LGUs "may levy an annual ad
valorem tax on real property such as land, building, machinery, and other improvements
not hereafter specifically exempted." The specific exemptions are provided by Section
234. Section 232 comes sequentially after Section 133(o),104 and even if the sequencing
is irrelevant, Section 232 would fall under the qualifying phrase of Section 133, "Unless
otherwise provided herein." It is sad, but not surprising that the majority is not willing to
consider or even discuss the general rule, but only the exemptions under Section 133 and
Section 234. After all, if the majority is dead set in ruling for MIAA no matter what the
law says, why bother citing what the law does say.
Constitution, Laws and
Jurisprudence Have Long
Explained the Rationale
Behind the Local Taxation

Of GOCCs.
This blithe disregard of precedents, almost all of them unanimously decided, is nowhere
more evident than in the succeeding discussion of the majority, which asserts that the
power of local governments to tax national government instrumentalities be construed
strictly against local governments. The Maceda case, decided before the Local
Government Code, is cited, as is Basco. This section of the majority employs deliberate
pretense that the Code never existed, or that the fundamentals of local autonomy are of
limited effect in our country. Why is it that the Local Government Code is barely
mentioned in this section of the majority? Because Section 5 of the Code, purposely
omitted by the majority provides for a different rule of interpretation than that asserted:
Section 5. Rules of Interpretation. In the interpretation of the provisions of this Code,
the following rules shall apply:
(a) Any provision on a power of a local government unit shall be liberally interpreted in
its favor, and in case of doubt, any question thereon shall be resolved in favor of
devolution of powers and of the lower local government unit. Any fair and reasonable
doubt as to the existence of the power shall be interpreted in favor of the local
government unit concerned;
(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly
against the local government unit enacting it, and liberally in favor of the taxpayer. Any
tax exemption, incentive or relief granted by any local government unit pursuant to the
provisions of this Code shall be construed strictly against the person claiming it; xxx
Yet the majority insists that "there is no point in national and local governments taxing
each other, unless a sound and compelling policy requires such transfer of public funds
from one government pocket to another."105 I wonder whether the Constitution satisfies
the majority's desire for "a sound and compelling policy." To repeat:
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
xxx
Section 5. Each local government unit shall have the power to create its own sources of

revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments.
Or how about the Local Government Code, presumably an expression of sound and
compelling policy considering that it was enacted by the legislature, that veritable source
of all statutes:
SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall
exercise its power to create its own sources of revenue and to levy taxes, fees, and
charges subject to the provisions herein, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government
units.
Justice Puno, in National Power Corporation v. City of Cabanatuan,106 provides a more
"sound and compelling policy considerations" that would warrant sustaining the
taxability of government-owned entities by local government units under the Local
Government Code.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of the local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. As this Court observed in the Mactan case,
"the original reasons for the withdrawal of tax exemption privileges granted to
government-owned or controlled corporations and all other units of government were that
such privilege resulted in serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises." With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or
otherwise, by paying taxes or other charges due from them.107
I dare not improve on Justice Puno's exhaustive disquisition on the statutory and
jurisprudential shift brought about the acceptance of the principles of local autonomy:
In recent years, the increasing social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as
public welfare and similar objectives. Taxation assumes even greater significance with
the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy
taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution,
viz:
"Section 5. Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes,
fees and charges shall accrue exclusively to the Local Governments."

This paradigm shift results from the realization that genuine development can be
achieved only by strengthening local autonomy and promoting decentralization of
governance. For a long time, the country's highly centralized government structure has
bred a culture of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and imaginative
resilience in matters of local development on the part of local government leaders." 35
The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, section 3 of Article X of the 1987
Constitution mandates Congress to enact a local government code that will, consistent
with the basic policy of local autonomy, set the guidelines and limitations to this grant of
taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system
of decentralization with effective mechanisms of recall, initiative, and referendum,
allocate among the different local government units their powers, responsibilities, and
resources, and provide for the qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials, and all other matters relating
to the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959, the Local Autonomy Act of 1959,
the Decentralization Act of 1967 and the Local Government Code of 1983. Despite these
initiatives, however, the shackles of dependence on the national government remained.
Local government units were faced with the same problems that hamper their capabilities
to participate effectively in the national development efforts, among which are: (a)
inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited
authority to prioritize and approve development projects, (d) heavy dependence on
external sources of income, and (e) limited supervisory control over personnel of national
line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of
LGUs to include taxes which were prohibited by previous laws such as the imposition of
taxes on forest products, forest concessionaires, mineral products, mining operations, and
the like. The LGC likewise provides enough flexibility to impose tax rates in accordance
with their needs and capabilities. It does not prescribe graduated fixed rates but merely
specifies the minimum and maximum tax rates and leaves the determination of the actual
rates to the respective sanggunian.108
And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of
Iloilo109, provides especially clear and emphatic rationale:

In closing, we reiterate that in taxing government-owned or controlled corporations, the

State ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br.
XXV, 38 we elucidated:
Actually, the State has no reason to decry the taxation of NPC's properties, as and by way
of real property taxes. Real property taxes, after all, form part and parcel of the financing
apparatus of the Government in development and nation-building, particularly in the local
government level.
xxxxxxxxx
To all intents and purposes, real property taxes are funds taken by the State with one hand
and given to the other. In no measure can the government be said to have lost anything.
Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax
exemption privileges granted to government-owned and controlled corporations and all
other units of government was that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, hence resulting in the
need for these entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.110
How does the majority counter these seemingly valid rationales which establish the
soundness of a policy consideration subjecting national instrumentalities to local
taxation? Again, by simply ignoring that these doctrines exist. It is unfortunate if the
majority deems these cases or the principles of devolution and local autonomy as simply
too inconvenient, and relies instead on discredited precedents. Of course, if the majority
faces the issues squarely, and expressly discusses why Basco was right and Mactan was
wrong, then this entire endeavor of the Court would be more intellectually satisfying.
But, this is not a game the majority wants to play.
Mischaracterization of My
Views on the Tax Exemption
Enjoyed by the National Government
Instead, the majority engages in an extended attack pertaining to Section 193,
mischaracterizing my views on that provision as if I had been interpreting the provision
as making "the national government, which itself is a juridical person, subject to tax by
local governments since the national government is not included in the enumeration of
exempt entities in Section 193."111
Nothing is farther from the truth. I have never advanced any theory of the sort imputed in
the majority. My main thesis on the matter merely echoes the explicit provision of
Section 193 that unless otherwise provided in the Local Government Code (LGC) all tax
exemptions enjoyed by all persons, whether natural or juridical, including GOCCs, were

withdrawn upon the effectivity of the Code. Since the provision speaks of withdrawal of
tax exemptions of persons, it follows that the exemptions theretofore enjoyed by MIAA
which is definitely a person are deemed withdrawn upon the advent of the Code.
On the other hand, the provision does not address the question of who are beyond the
reach of the taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal
thereof assumes that the person or entity involved is subject to tax. Thus, Section 193
does not apply to entities which were never given any tax exemption. This would include
the national government and its political subdivisions which, as a general rule, are not
subjected to tax in the first place.112 Corollarily, the national government and its political
subdivisions do not need tax exemptions. And Section 193 which ordains the withdrawal
of tax exemptions is obviously irrelevant to them.
Section 193 is in point for the disposition of this case as it forecloses dependence for the
grant of tax exemption to MIAA on Section 21 of its charter. Even the majority should
concede that the charter section is now ineffectual, as Section 193 withdraws the tax
exemptions previously enjoyed by all juridical persons.
With Section 193 mandating the withdrawal of tax exemptions granted to all persons
upon the effectivity of the LGC, for MIAA to continue enjoying exemption from realty
tax, it will have to rely on a basis other than Section 21 of its charter.
Lung Center of the Philippines v. Quezon City113 provides another illustrative example
of the jurisprudential havoc wrought about by the majority. Pursuant to its charter, the
Lung Center was organized as a trust administered by an eponymous GOCC organized
with the SEC.114 There is no doubt it is a GOCC, even by the majority's reckoning.
Applying the Administrative Code, it is also considered as an agency, the term
encompassing even GOCCs. Yet since the Administrative Code definition of
"instrumentalities" encompasses agencies, especially those not attached to a line
department such as the Lung Center, it also follows that the Lung Center is an
instrumentality, which for the majority is exempt from all local government taxes,
especially real estate taxes. Yet just in 2004, the Court unanimously held that the Lung
Center was not exempt from real property taxes. Can the majority and Lung Center be
reconciled? I do not see how, and no attempt is made to demonstrate otherwise.
Another key point. The last paragraph of Section 234 specifically asserts that any
previous exemptions from realty taxes granted to or enjoyed by all persons, including all
GOCCs, are thereby withdrawn. The majority's interpretation of Sections 133 and 234(a)
however necessarily implies that all instrumentalities, including GOCCs, can never be
subjected to real property taxation under the Code. If that is so, what then is the sense of
the last paragraph specifically withdrawing previous tax exemptions to all persons,
including GOCCs when juridical persons such as MIAA are anyway, to his view, already
exempt from such taxes under Section 133? The majority's interpretation would
effectively render the express and emphatic withdrawal of previous exemptions to
GOCCs inutile. Ut magis valeat quam pereat. Hence, where a statute is susceptible of
more than one interpretation, the court should adopt such reasonable and beneficial

construction which will render the provision thereof operative and effective, as well as
harmonious with each other.115
But, the majority seems content rendering as absurd the Local Government Code, since it
does not have much use anyway for the Code's general philosophy of fiscal autonomy, as
evidently seen by the continued reliance on Basco or Maceda. Local government rule has
never been a grant of emancipation from the national government. This is the favorite
bugaboo of the opponents of local autonomythe fallacy that autonomy equates to
independence.
Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees
or charges of any kind. Moreover, the taxation of national instrumentalities and agencies
by LGUs should be strictly construed against the LGUs, citing Maceda and Basco. No
mention is made of the subsequent rejection of these cases in jurisprudence following the
Local Government Code, including Mactan. The majority is similarly silent on the
general rule under Section 232 on real property taxation or Section 5 on the rules of
construction of the Local Government Code.
V.
MIAA, and not the National Government
Is the Owner of the Subject Taxable Properties
Section 232 of the Local Government Code explicitly provides that there are exceptions
to the general rule on rule property taxation, as "hereafter specifically exempted." Section
234, certainly "hereafter," provides indubitable basis for exempting entities from real
property taxation. It provides the most viable legal support for any claim that an
governmental entity such as the MIAA is exempt from real property taxes. To repeat:
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from
payment of the real property tax:
xxx
(f) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person:
The majority asserts that the properties owned by MIAA are owned by the Republic of
the Philippines, thus placing them under the exemption under Section 234. To arrive at
this conclusion, the majority employs four main arguments.
MIAA Property Is Patrimonial

And Not Part of Public Dominion

The majority claims that the Airport Lands and Buildings are property of public dominion
as defined by the Civil Code, and therefore owned by the State or the Republic of the
Philippines. But as pointed out by Justice Azcuna in the first PPA case, if indeed a
property is considered part of the public dominion, such property is "owned by the
general public and cannot be declared to be owned by a public corporation, such as [the
PPA]."
Relevant on this point are the following provisions of the MIAA charter:
Section 3. Creation of the Manila International Airport Authority. xxx
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. xxx Any
portion thereof shall not be disposed through sale or through any other mode unless
specifically approved by the President of the Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers rights, interests and privileges belonging
to the Bureau of Air Transportation relating to airport works or air operations, including
all equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority.
Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the
national government that asserts legal title over the Airport Lands and Buildings. There
was an express transfer of ownership between the MIAA and the national government. If
the distinction is to be blurred, as the majority does, between the
State/Republic/Government and a body corporate such as the MIAA, then the MIAA
charter showcases the remarkable absurdity of an entity transferring property to itself.
Nothing in the Civil Code or the Constitution prohibits the State from transferring
ownership over property of public dominion to an entity that it similarly owns. It is just
like a family transferring ownership over the properties its members own into a family
corporation. The family exercises effective control over the administration and
disposition of these properties. Yet for several purposes under the law, such as taxation, it
is the corporation that is deemed to own those properties. A similar situation obtains with
MIAA, the State, and the Airport Lands and Buildings.
The second Public Ports Authority case, penned by Justice Callejo, likewise lays down
useful doctrines in this regard. The Court refuted the claim that the properties of the PPA
were owned by the Republic of the Philippines, noting that PPA's charter expressly
transferred ownership over these properties to the PPA, a situation which similarly
obtains with MIAA. The Court even went as far as saying that the fact that the PPA "had

not been issued any torrens title over the port and port facilities and appurtenances is of
no legal consequence. A torrens title does not, by itself, vest ownership; it is merely an
evidence of title over properties. xxx It has never been recognized as a mode of acquiring
ownership over real properties."116
The Court further added:
xxx The bare fact that the port and its facilities and appurtenances are accessible to the
general public does not exempt it from the payment of real property taxes. It must be
stressed that the said port facilities and appurtenances are the petitioner's corporate
patrimonial properties, not for public use, and that the operation of the port and its
facilities and the administration of its buildings are in the nature of ordinary business. The
petitioner is clothed, under P.D. No. 857, with corporate status and corporate powers in
the furtherance of its proprietary interests xxx The petitioner is even empowered to invest
its funds in such government securities approved by the Board of Directors, and derives
its income from rates, charges or fees for the use by vessels of the port premises,
appliances or equipment. xxx Clearly then, the petitioner is a profit-earning corporation;
hence, its patrimonial properties are subject to tax.117
There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for
public use. A similar argument was propounded by the Light Rail Transit Authority in
Light Rail Transit Authority v. Central Board of Assessment,118 which was cited in
Philippine Ports Authority and deserves renewed emphasis. The Light Rail Transit
Authority (LRTA), a body corporate, "provides valuable transportation facilities to the
paying public."119 It claimed that its carriage-ways and terminal stations are immovably
attached to government-owned national roads, and to impose real property taxes
thereupon would be to impose taxes on public roads. This view did not persuade the
Court, whose decision was penned by Justice (now Chief Justice) Panganiban. It was
noted:
Though the creation of the LRTA was impelled by public service to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila its
operation undeniably partakes of ordinary business. Petitioner is clothed with corporate
status and corporate powers in the furtherance of its proprietary objectives. Indeed, it
operates much like any private corporation engaged in the mass transport industry. Given
that it is engaged in a service-oriented commercial endeavor, its carriageways and
terminal stations are patrimonial property subject to tax, notwithstanding its claim of
being a government-owned or controlled corporation.
xxx
Petitioner argues that it merely operates and maintains the LRT system, and that the
actual users of the carriageways and terminal stations are the commuting public. It adds
that the public use character of the LRT is not negated by the fact that revenue is obtained
from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is
accessible only to those who pay the required fare. It is thus apparent that petitioner does
not exist solely for public service, and that the LRT carriageways and terminal stations
are not exclusively for public use. Although petitioner is a public utility, it is nonetheless
profit-earning. It actually uses those carriageways and terminal stations in its public
utility business and earns money therefrom.120
xxx
Even granting that the national government indeed owns the carriageways and terminal
stations, the exemption would not apply because their beneficial use has been granted to
petitioner, a taxable entity.121
There is no substantial distinction between the properties held by the PPA, the LRTA, and
the MIAA. These three entities are in the business of operating facilities that promote
public transportation.
The majority further asserts that MIAA's properties, being part of the public dominion,
are outside the commerce of man. But if this is so, then why does Section 3 of MIAA's
charter authorize the President of the Philippines to approve the sale of any of these
properties? In fact, why does MIAA's charter in the first place authorize the transfer of
these airport properties, assuming that indeed these are beyond the commerce of man?
No Trust Has Been Created
Over MIAA Properties For
The Benefit of the Republic
The majority posits that while MIAA might be holding title over the Airport Lands and
Buildings, it is holding it in trust for the Republic. A provision of the Administrative Code
is cited, but said provision does not expressly provide that the property is held in trust.
Trusts are either express or implied, and only those situations enumerated under the Civil
Code would constitute an implied trust. MIAA does not fall within this enumeration, and
neither is there a provision in MIAA's charter expressly stating that these properties are
being held in trust. In fact, under its charter, MIAA is obligated to retain up to eighty
percent (80%) of its gross operating income, not an inconsequential sum assuming that
the beneficial owner of MIAA's properties is actually the Republic, and not the MIAA.
Also, the claim that beneficial ownership over the MIAA remains with the government
and not MIAA is ultimately irrelevant. Section 234(a) of the Local Government Code
provides among those exempted from paying real property taxes are "[r]eal property
owned by the [Republic] except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person." In the context of Section 234(a), the
identity of the beneficial owner over the properties is not determinative as to whether the
exemption avails. It is the identity of the beneficial user of the property owned by the

Republic or its political subdivisions that is crucial, for if said beneficial user is a taxable
person, then the exemption does not lie.
I fear the majority confuses the notion of what might be construed as "beneficial
ownership" of the Republic over the properties of MIAA as nothing more than what
arises as a consequence of the fact that the capital of MIAA is contributed by the National
Government.122 If so, then there is no difference between the State's ownership rights
over MIAA properties than those of a majority stockholder over the properties of a
corporation. Even if such shareholder effectively owns the corporation and controls the
disposition of its assets, the personality of the stockholder remains separately distinct
from that of the corporation. A brief recall of the entrenched rule in corporate law is in
order:
The first consequence of the doctrine of legal entity regarding the separate identity of the
corporation and its stockholders insofar as their obligations and liabilities are concerned,
is spelled out in this general rule deeply entrenched in American jurisprudence:
Unless the liability is expressly imposed by constitutional or statutory provisions, or by
the charter, or by special agreement of the stockholders, stockholders are not personally
liable for debts of the corporation either at law or equity. The reason is that the
corporation is a legal entity or artificial person, distinct from the members who compose
it, in their individual capacity; and when it contracts a debt, it is the debt of the legal
entity or artificial person the corporation and not the debt of the individual members.
(13A Fletcher Cyc. Corp. Sec. 6213)
The entirely separate identity of the rights and remedies of a corporation itself and its
individual stockholders have been given definite recognition for a long time. Applying
said principle, the Supreme Court declared that a corporation may not be made to answer
for acts or liabilities of its stockholders or those of legal entities to which it may be
connected, or vice versa. (Palay Inc. v. Clave et. al. 124 SCRA 638) It was likewise
declared in a similar case that a bonafide corporation should alone be liable for corporate
acts duly authorized by its officers and directors. (Caram Jr. v. Court of Appeals et.al. 151
SCRA, p. 372)123
It bears repeating that MIAA under its charter, is expressly conferred the right to exercise
all the powers of a corporation under the Corporation Law, including the right to
corporate succession, and the right to sue and be sued in its corporate name.124 The
national government made a particular choice to divest ownership and operation of the
Manila International Airport and transfer the same to such an empowered entity due to
perceived advantages. Yet such transfer cannot be deemed consequence free merely
because it was the State which contributed the operating capital of this body corporate.
The majority claims that the transfer the assets of MIAA was meant merely to effect a
reorganization. The imputed rationale for such transfer does not serve to militate against
the legal consequences of such assignment. Certainly, if it was intended that the transfer
should be free of consequence, then why was it effected to a body corporate, with a

distinct legal personality from that of the State or Republic? The stated aims of the MIAA
could have very well been accomplished by creating an agency without independent
juridical personality.
VI.
MIAA Performs Proprietary Functions
Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines
or its political subdivisions from realty taxation. The obvious question is what comprises
"the Republic of the Philippines." I think the key to understanding the scope of "the
Republic" is the phrase "political subdivisions." Under the Constitution, political
subdivisions are defined as "the provinces, cities, municipalities and barangays."125 In
correlation, the Administrative Code of 1987 defines "local government" as referring to
"the political subdivisions established by or in accordance with the Constitution."
Clearly then, these political subdivisions are engaged in the exercise of sovereign
functions and are accordingly exempt. The same could be said generally of the national
government, which would be similarly exempt. After all, even with the principle of local
autonomy, it is inherently noxious and self-defeatist for local taxation to interfere with the
sovereign exercise of functions. However, the exercise of proprietary functions is a
different matter altogether.
Sovereign and Proprietary
Functions Distinguished
Sovereign or constituent functions are those which constitute the very bonds of society
and are compulsory in nature, while ministrant or proprietary functions are those
undertaken by way of advancing the general interests of society and are merely
optional.126 An exhaustive discussion on the matter was provided by the Court in Bacani
v. NACOCO:127
xxx This institution, when referring to the national government, has reference to what our
Constitution has established composed of three great departments, the legislative,
executive, and the judicial, through which the powers and functions of government are
exercised. These functions are twofold: constituent and ministrant. The former are those
which constitute the very bonds of society and are compulsory in nature; the latter are
those that are undertaken only by way of advancing the general interests of society, and
are merely optional. President Wilson enumerates the constituent functions as follows:
"'(1) The keeping of order and providing for the protection of persons and property from
violence and robbery.
'(2) The fixing of the legal relations between man and wife and between parents and
children.

'(3) The regulation of the holding, transmission, and interchange of property, and the
determination of its liabilities for debt or for crime.
'(4) The determination of contract rights between individuals.
'(5) The definition and punishment of crime.
'(6) The administration of justice in civil cases.
'(7) The determination of the political duties, privileges, and relations of citizens.
'(8) Dealings of the state with foreign powers: the preservation of the state from external
danger or encroachment and the advancement of its international interests.'" (Malcolm,
The Government of the Philippine Islands, p. 19.)
The most important of the ministrant functions are: public works, public education,
public charity, health and safety regulations, and regulations of trade and industry. The
principles determining whether or not a government shall exercise certain of these
optional functions are: (1) that a government should do for the public welfare those things
which private capital would not naturally undertake and (2) that a government should do
these things which by its very nature it is better equipped to administer for the public
welfare than is any private individual or group of individuals. (Malcolm, The
Government of the Philippine Islands, pp. 19-20.)
From the above we may infer that, strictly speaking, there are functions which our
government is required to exercise to promote its objectives as expressed in our
Constitution and which are exercised by it as an attribute of sovereignty, and those which
it may exercise to promote merely the welfare, progress and prosperity of the people. To
this latter class belongs the organization of those corporations owned or controlled by the
government to promote certain aspects of the economic life of our people such as the
National Coconut Corporation. These are what we call government-owned or controlled
corporations which may take on the form of a private enterprise or one organized with
powers and formal characteristics of a private corporations under the Corporation
Law.128
The Court in Bacani rejected the proposition that the National Coconut Corporation
exercised sovereign functions:
Does the fact that these corporations perform certain functions of government make them
a part of the Government of the Philippines?
The answer is simple: they do not acquire that status for the simple reason that they do
not come under the classification of municipal or public corporation. Take for instance
the National Coconut Corporation. While it was organized with the purpose of "adjusting
the coconut industry to a position independent of trade preferences in the United States"

and of providing "Facilities for the better curing of copra products and the proper
utilization of coconut by-products," a function which our government has chosen to
exercise to promote the coconut industry, however, it was given a corporate power
separate and distinct from our government, for it was made subject to the provisions of
our Corporation Law in so far as its corporate existence and the powers that it may
exercise are concerned (sections 2 and 4, Commonwealth Act No. 518). It may sue and be
sued in the same manner as any other private corporations, and in this sense it is an entity
different from our government. As this Court has aptly said, "The mere fact that the
Government happens to be a majority stockholder does not make it a public corporation"
(National Coal Co. vs. Collector of Internal Revenue, 46 Phil., 586-587). "By becoming a
stockholder in the National Coal Company, the Government divested itself of its
sovereign character so far as respects the transactions of the corporation. . . . Unlike the
Government, the corporation may be sued without its consent, and is subject to taxation.
Yet the National Coal Company remains an agency or instrumentality of government."
(Government of the Philippine Islands vs. Springer, 50 Phil., 288.)
The following restatement of the entrenched rule by former SEC Chairperson Rosario
Lopez bears noting:
The fact that government corporations are instrumentalities of the State does not divest
them with immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when
the government engages in a particular business through the instrumentality of a
corporation, it divests itself pro hoc vice of its sovereign character so as to subject itself
to the rules governing private corporations, (PNB v. Pabolan 82 SCRA 595) and is to be
treated like any other corporation. (PNR v. Union de Maquinistas Fogonero y Motormen,
84 SCRA 223)
In the same vein, when the government becomes a stockholder in a corporation, it does
not exercise sovereignty as such. It acts merely as a corporator and exercises no other
power in the management of the affairs of the corporation than are expressly given by the
incorporating act. Nor does the fact that the government may own all or a majority of the
capital stock take from the corporation its character as such, or make the government the
real party in interest. (Amtorg Trading Corp. v. US 71 F2d 524, 528)129
MIAA Performs Proprietary
Functions No Matter How
Vital to the Public Interest
The simple truth is that, based on these accepted doctrinal tests, MIAA performs
proprietary functions. The operation of an airport facility by the State may be imbued
with public interest, but it is by no means indispensable or obligatory on the national
government. In fact, as demonstrated in other countries, it makes a lot of economic sense
to leave the operation of airports to the private sector.

The majority tries to becloud this issue by pointing out that the MIAA does not compete
in the marketplace as there is no competing international airport operated by the private
sector; and that MIAA performs an essential public service as the primary domestic and
international airport of the Philippines. This premise is false, for one. On a local scale,
MIAA competes with other international airports situated in the Philippines, such as
Davao International Airport and MCIAA. More pertinently, MIAA also competes with
other international airports in Asia, at least. International airlines take into account the
quality and conditions of various international airports in determining the number of
flights it would assign to a particular airport, or even in choosing a hub through which
destinations necessitating connecting flights would pass through.
Even if it could be conceded that MIAA does not compete in the market place, the
example of the Philippine National Railways should be taken into account. The PNR does
not compete in the marketplace, and performs an essential public service as the operator
of the railway system in the Philippines. Is the PNR engaged in sovereign functions? The
Court, in Malong v. Philippine National Railways,130 held that it was not.131
Even more relevant to this particular case is Teodoro v. National Airports
Corporation,132 concerning the proper appreciation of the functions performed by the
Civil Aeronautics Administration (CAA), which had succeeded the defunction National
Airports Corporation. The CAA claimed that as an unincorporated agency of the Republic
of the Philippines, it was incapable of suing and being sued. The Court noted:
Among the general powers of the Civil Aeronautics Administration are, under Section 3,
to execute contracts of any kind, to purchase property, and to grant concession rights, and
under Section 4, to charge landing fees, royalties on sales to aircraft of aviation gasoline,
accessories and supplies, and rentals for the use of any property under its management.
These provisions confer upon the Civil Aeronautics Administration, in our opinion, the
power to sue and be sued. The power to sue and be sued is implied from the power to
transact private business. And if it has the power to sue and be sued on its behalf, the
Civil Aeronautics Administration with greater reason should have the power to prosecute
and defend suits for and against the National Airports Corporation, having acquired all
the properties, funds and choses in action and assumed all the liabilities of the latter. To
deny the National Airports Corporation's creditors access to the courts of justice against
the Civil Aeronautics Administration is to say that the government could impair the
obligation of its corporations by the simple expedient of converting them into
unincorporated agencies. 133
xxx
Eventually, the charter of the CAA was revised, and it among its expanded functions was
"[t]o administer, operate, manage, control, maintain and develop the Manila International
Airport."134 Notwithstanding this expansion, in the 1988 case of CAA v. Court of
Appeals135 the Court reaffirmed the ruling that the CAA was engaged in "private or nongovernmental functions."136 Thus, the Court had already ruled that the predecessor

agency of MIAA, the CAA was engaged in private or non-governmental functions. These
are more precedents ignored by the majority. The following observation from the Teodoro
case very well applies to MIAA.
The Civil Aeronautics Administration comes under the category of a private entity.
Although not a body corporate it was created, like the National Airports Corporation, not
to maintain a necessary function of government, but to run what is essentially a business,
even if revenues be not its prime objective but rather the promotion of travel and the
convenience of the traveling public. It is engaged in an enterprise which, far from being
the exclusive prerogative of state, may, more than the construction of public roads, be
undertaken by private concerns.137
If the determinative point in distinguishing between sovereign functions and proprietary
functions is the vitality of the public service being performed, then it should be noted that
there is no more important public service performed than that engaged in by public
utilities. But notably, the Constitution itself authorizes private persons to exercise these
functions as it allows them to operate public utilities in this country138 If indeed such
functions are actually sovereign and belonging properly to the government, shouldn't it
follow that the exercise of these tasks remain within the exclusive preserve of the State?
There really is no prohibition against the government taxing itself,139 and nothing
obscene with allowing government entities exercising proprietary functions to be taxed
for the purpose of raising the coffers of LGUs. On the other hand, it would be an even
more noxious proposition that the government or the instrumentalities that it owns are
above the law and may refuse to pay a validly imposed tax. MIAA, or any similar entity
engaged in the exercise of proprietary, and not sovereign functions, cannot avoid the
adverse-effects of tax evasion simply on the claim that it is imbued with some of the
attributes of government.
VII.
MIAA Property Not Subject to
Execution Sale Without Consent
Of the President.
Despite the fact that the City of Paraaque ineluctably has the power to impose real
property taxes over the MIAA, there is an equally relevant statutory limitation on this
power that must be fully upheld. Section 3 of the MIAA charter states that "[a]ny portion
[of the [lands transferred, conveyed and assigned to the ownership and administration of
the MIAA] shall not be disposed through sale or through any other mode unless
specifically approved by the President of the Philippines."140
Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can
be deemed as repealing this prohibition under Section 3, even if it effectively forecloses

one possible remedy of the LGU in the collection of delinquent real property taxes. While
the Local Government Code withdrew all previous local tax exemptions of the MIAA and
other natural and juridical persons, it did not similarly withdraw any previously enacted
prohibitions on properties owned by GOCCs, agencies or instrumentalities. Moreover, the
resulting legal effect, subjecting on one hand the MIAA to local taxes but on the other
hand shielding its properties from any form of sale or disposition, is not contradictory or
paradoxical, onerous as its effect may be on the LGU. It simply means that the LGU has
to find another way to collect the taxes due from MIAA, thus paving the way for a
mutually acceptable negotiated solution.141
There are several other reasons this statutory limitation should be upheld and applied to
this case. It is at this juncture that the importance of the Manila Airport to our national
life and commerce may be accorded proper consideration. The closure of the airport, even
by reason of MIAA's legal omission to pay its taxes, will have an injurious effect to our
national economy, which is ever reliant on air travel and traffic. The same effect would
obtain if ownership and administration of the airport were to be transferred to an LGU or
some other entity which were not specifically chartered or tasked to perform such vital
function. It is for this reason that the MIAA charter specifically forbids the sale or
disposition of MIAA properties without the consent of the President. The prohibition
prevents the peremptory closure of the MIAA or the hampering of its operations on
account of the demands of its creditors. The airport is important enough to be sheltered
by legislation from ordinary legal processes.
Section 3 of the MIAA charter may also be appreciated as within the proper exercise of
executive control by the President over the MIAA, a GOCC which despite its separate
legal personality, is still subsumed within the executive branch of government. The power
of executive control by the President should be upheld so long as such exercise does not
contravene the Constitution or the law, the President having the corollary duty to
faithfully execute the Constitution and the laws of the land.142 In this case, the exercise
of executive control is precisely recognized and authorized by the legislature, and it
should be upheld even if it comes at the expense of limiting the power of local
government units to collect real property taxes.
Had this petition been denied instead with Mactan as basis, but with the caveat that the
MIAA properties could not be subject of execution sale without the consent of the
President, I suspect that the parties would feel little distress. Through such action, both
the Local Government Code and the MIAA charter would have been upheld. The
prerogatives of LGUs in real property taxation, as guaranteed by the Local Government
Code, would have been preserved, yet the concerns about the ruinous effects of having to
close the Manila International Airport would have been averted. The parties would then
be compelled to try harder at working out a compromise, a task, if I might add, they are
all too willing to engage in.143 Unfortunately, the majority will cause precisely the
opposite result of unremitting hostility, not only to the City of Paraaque, but to the
thousands of LGUs in the country.
VIII.

Summary of Points
My points may be summarized as follows:
1) Mactan and a long line of succeeding cases have already settled the rule that under the
Local Government Code, enacted pursuant to the constitutional mandate of local
autonomy, all natural and juridical persons, even those GOCCs, instrumentalities and
agencies, are no longer exempt from local taxes even if previously granted an exemption.
The only exemptions from local taxes are those specifically provided under the Local
Government Code itself, or those enacted through subsequent legislation.
2) Under the Local Government Code, particularly Section 232, instrumentalities,
agencies and GOCCs are generally liable for real property taxes. The only exemptions
therefrom under the same Code are provided in Section 234, which include real property
owned by the Republic of the Philippines or any of its political subdivisions.
3) The subject properties are owned by MIAA, a GOCC, holding title in its own name.
MIAA, a separate legal entity from the Republic of the Philippines, is the legal owner of
the properties, and is thus liable for real property taxes, as it does not fall within the
exemptions under Section 234 of the Local Government Code.
4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a
result, the City of Paraaque is prohibited from seizing or selling these properties by
public auction in order to satisfy MIAA's tax liability. In the end, MIAA is encumbered
only by a limited lien possessed by the City of Paraaque.
On the other hand, the majority's flaws are summarized as follows:
1) The majority deliberately ignores all precedents which run counter to its hypothesis,
including Mactan. Instead, it relies and directly cites those doctrines and precedents
which were overturned by Mactan. By imposing a different result than that warranted by
the precedents without explaining why Mactan or the other precedents are wrong, the
majority attempts to overturn all these ruling sub silencio and without legal justification,
in a manner that is not sanctioned by the practices and traditions of this Court.
2) The majority deliberately ignores the policy and philosophy of local fiscal autonomy,
as mandated by the Constitution, enacted under the Local Government Code, and
affirmed by precedents. Instead, the majority asserts that there is no sound rationale for
local governments to tax national government instrumentalities, despite the blunt
existence of such rationales in the Constitution, the Local Government Code, and
precedents.
3) The majority, in a needless effort to justify itself, adopts an extremely strained
exaltation of the Administrative Code above and beyond the Corporation Code and the
various legislative charters, in order to impose a wholly absurd definition of GOCCs that

effectively declassifies innumerable existing GOCCs, to catastrophic legal consequences.

4) The majority asserts that by virtue of Section 133(o) of the Local Government Code,
all national government agencies and instrumentalities are exempt from any form of local
taxation, in contravention of several precedents to the contrary and the proviso under
Section 133, "unless otherwise provided herein [the Local Government Code]."
5) The majority erroneously argues that MIAA holds its properties in trust for the
Republic of the Philippines, and that such properties are patrimonial in character. No
express or implied trust has been created to benefit the national government. The legal
distinction between sovereign and proprietary functions, as affirmed by jurisprudence,
likewise preclude the classification of MIAA properties as patrimonial.
IX.
Epilogue
If my previous discussion still fails to convince on how wrong the majority is, then the
following points are well-worth considering. The majority cites the Bangko Sentral ng
Pilipinas (Bangko Sentral) as a government instrumentality that exercises corporate
powers but not organized as a stock or non-stock corporation. Correspondingly for the
majority, the Bangko ng Sentral is exempt from all forms of local taxation by LGUs by
virtue of the Local Government Code.
Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:
SECTION 125. Tax Exemptions. The Bangko Sentral shall be exempt for a period of
five (5) years from the approval of this Act from all national, provincial, municipal and
city taxes, fees, charges and assessments.
The New Central Bank Act was promulgated after the Local Government Code if the BSP
is already preternaturally exempt from local taxation owing to its personality as an
"government instrumentality," why then the need to make a new grant of exemption,
which if the majority is to be believed, is actually a redundancy. But even more tellingly,
does not this provision evince a clear intent that after the lapse of five (5) years, that the
Bangko Sentral will be liable for provincial, municipal and city taxes? This is the clear
congressional intent, and it is Congress, not this Court which dictates which entities are
subject to taxation and which are exempt.
Perhaps this notion will offend the majority, because the Bangko Sentral is not even a
government owned corporation, but a government instrumentality, or perhaps "loosely", a
"government corporate entity." How could such an entity like the Bangko Sentral , which
is not even a government owned corporation, be subjected to local taxation like any mere
mortal? But then, see Section 1 of the New Central Bank Act:
SECTION 1. Declaration of Policy. The State shall maintain a central monetary

authority that shall function and operate as an independent and accountable body
corporate in the discharge of its mandated responsibilities concerning money, banking
and credit. In line with this policy, and considering its unique functions and
responsibilities, the central monetary authority established under this Act, while being a
government-owned corporation, shall enjoy fiscal and administrative autonomy.
Apparently, the clear legislative intent was to create a government corporation known as
the Bangko Sentral ng Pilipinas. But this legislative intent, the sort that is evident from
the text of the provision and not the one that needs to be unearthed from the bowels of the
archival offices of the House and the Senate, is for naught to the majority, as it
contravenes the Administrative Code of 1987, which after all, is "the governing law
defining the status and relationship of government agencies and instrumentalities" and
thus superior to the legislative charter in determining the personality of a chartered entity.
Its like saying that the architect who designed a school building is better equipped to
teach than the professor because at least the architect is familiar with the geometry of the
classroom.
Consider further the example of the Philippine Institute of Traditional and Alternative
Health Care (PITAHC), created by Republic Act No. 8243 in 1997. It has similar
characteristics as MIAA in that it is established as a body corporate,144 and empowered
with the attributes of a corporation,145 including the power to purchase or acquire real
properties.146 However the PITAHC has no capital stock and no members, thus
following the majority, it is not a GOCC.
The state policy that guides PITAHC is the development of traditional and alternative
health care,147 and its objectives include the promotion and advocacy of alternative,
preventive and curative health care modalities that have been proven safe, effective and
cost effective.148 "Alternative health care modalities" include "other forms of nonallophatic, occasionally non-indigenous or imported healing methods" which include,
among others "reflexology, acupuncture, massage, acupressure" and chiropractics.149
Given these premises, there is no impediment for the PITAHC to purchase land and
construct thereupon a massage parlor that would provide a cheaper alternative to the
opulent spas that have proliferated around the metropolis. Such activity is in line with the
purpose of the PITAHC and with state policy. Is such massage parlor exempt from realty
taxes? For the majority, it is, for PITAHC is an instrumentality or agency exempt from
local government taxation, which does not fall under the exceptions under Section 234 of
the Local Government Code. Hence, this massage parlor would not just be a shelter for
frazzled nerves, but for taxes as well.
Ridiculous? One might say, certainly a decision of the Supreme Court cannot be
construed to promote an absurdity. But precisely the majority, and the faulty reasoning it
utilizes, opens itself up to all sorts of mischief, and certainly, a tax-exempt massage parlor
is one of the lesser evils that could arise from the majority ruling. This is indeed a very
strange and very wrong decision.

I dissent.
DANTE O. TINGA
G.R. No. L-43350

December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,

vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title
No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To
guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14,
1929, executed in favor of the Philippine National Bank a first mortgage on the four
parcels of land above-mentioned. A second mortgage in favor of the same bank was in
April of 1930 executed by Tabora over the same lands to guarantee the payment of
another loan amounting to P7,000. A third mortgage on the same lands was executed on
April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum of
P2,9000. These mortgages were registered and annotations thereof appear at the back of
transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de
Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by
him was sold to the plaintiff company, said to under process of incorporation, in
consideration of one peso (P1) subject to the mortgages in favor of the Philippine
National Bank and Severina Buzon and, to the condition that the certificate of title to said
lands shall not be transferred to the name of the plaintiff company until the latter has fully
and completely paid Tabora's indebtedness to the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and
Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of
directors of said company adopted a resolution (Exhibit G) authorizing its president, Jose
Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000.
Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale
executed before a notary public by the terms of which the plaintiff sold ceded and
transferred to the defendant all its right, titles, and interest in and to the four parcels of

land described in transfer certificate in turn obligated himself to shoulder the three
mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by
the defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed before a notary public in accordance with
which the four parcels of land were given a security for the payment of the promissory
note, Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on
January 25, 1934, brought this action in the Court of First Instance of Manila praying that
judgment be rendered against the defendant for the sum of P25,300, with interest at legal
rate from the date of the filing of the complaint, and the costs of the suits. After trial, the
court below, on December 18, 1934, rendered judgment absolving the defendant, with
costs against the plaintiff. Plaintiff presented a motion for new trial on January 14, 1935,
which motion was denied by the trial court on January 19 of the same year. After due
exception and notice, plaintiff has appealed to this court and makes an assignment of
various errors.
In dismissing the complaint against the defendant, the court below, reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.
While we do not agree with this conclusion, we have however voted to affirm the
judgment appealed from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said
company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer
was made almost five months before the incorporation of the company. Unquestionably, a
duly organized corporation has the power to purchase and hold such real property as the
purposes for which such corporation was formed may permit and for this purpose may
enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No.
1459). But before a corporation may be said to be lawfully organized, many things have
to be done. Among other things, the law requires the filing of articles of incorporation
(secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the requirements
of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case
before us it can not be denied that the plaintiff was not yet incorporated when it entered
into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una
sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not
being in legal existence then, it did not possess juridical capacity to enter into the
contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would seem
to be self evident. . . . A corporation, until organized, has no being, franchises or faculties.
Nor do those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter there is not a corporation nor does it possess franchise
or faculties for it or others to exercise, until it acquires a complete existence. (Gent vs.
Manufacturers and Merchant's Mutual Insurance Company, 107 Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel Tabora
as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporations on the other hand. For reasons that
are self-evident, these promoters could not have acted as agent for a projected corporation
since that which no legal existence could have no agent. A corporation, until organized,
has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not
saying that under no circumstances may the acts of promoters of a corporation be ratified
by the corporation if and when subsequently organized. There are, of course, exceptions
(Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the
peculiar facts and circumstances of the present case we decline to extend the doctrine of
ratification which would result in the commission of injustice or fraud to the candid and
unwary.(Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L.
R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick
Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182
Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the registered
owner of the four parcels of land, which he succeeded in mortgaging to the Philippine
National Bank so that he might have the necessary funds with which to convert and
develop them into fishery. He appeared to have met with financial reverses. He formed a
corporation composed of himself, his wife, and a few others. From the articles of
incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock
subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife,
Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is
made to appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were
directors and the latter was treasurer as well. In fact, to this day, the lands remain
inscribed in Tabora's name. The defendant always regarded Tabora as the owner of the
lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation,
intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the
Philippine National Bank, mortgagee of the four parcels of land, always treated Tabora as
the owner of the same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641)
were brought against Tabora in the Court of First Instance of Manila and in both cases a
writ of attachment against the four parcels of land was issued. The Philippine National
Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in the making him sign Exhibits B, C, and D and in making him, among
other things, assume the payment of Tabora's indebtedness to the Philippine National
Bank. The promisory note, Exhibit C, was made payable to the plaintiff company so that
it may not attached by Tabora's creditors, two of whom had obtained writs of attachment
against the four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale to
the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from Manuel
Tabora to the Cagayan Fishing Development Company, Inc., which transfer is evidenced
by Exhibit A, was subject to a condition precedent (condicion suspensiva), namely, the
payment of the mortgage debt of said Tabora to the Philippine National Bank, and that
this condition not having been complied with by the Cagayan Fishing Development
Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly
and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the
conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development
Company, Inc. was null because at the time it was affected the corporation was nonexistent, we deem it unnecessary to discuss this point.lawphil.net
The decision of the lower court is accordingly affirmed, with costs against the appellant.
So Ordered.
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
G.R. No. L-48627

June 30, 1987

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners

vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO,
respondents.

CRUZ, J.:
We gave limited due course to this petition on the question of the solidary liability of the
petitioners with their co-defendants in the lower court 1 because of the challenge to the
following paragraph in the dispositive portion of the decision of the respondent court: *
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to
the organization of the defendant corporation, plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they had no
contract whatsoever with the private respondent regarding the above-mentioned services.
Their position is that as mere subsequent investors in the corporation that was later
created, they should not be held solidarily liable with the Filipinas Orient Airways, a
separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower

court, ** who were the ones who requested the said services from the private respondent.
3
We are not concerned here with the petitioners' co-defendants, who have not appealed the
decision of the respondent court and may, for this reason, be presumed to have accepted
the same. For purposes of resolving this case before us, it is not necessary to determine
whether it is the promoters of the proposed corporation, or the corporation itself after its
organization, that shall be responsible for the expenses incurred in connection with such
organization.
The only question we have to decide now is whether or not the petitioners themselves are
also and personally liable for such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this
wise:
As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the
preparation of the project study and the pre-organizational services in the amount of
P50,000.00, not only the defendant corporation but the other defendants including
defendants Caram should be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and Garcia that plaintiff handled
the preparation of the project study which project study was presented to defendant
Caram so the latter was convinced to invest in the proposed airlines. The project study
was revised for purposes of presentation to financiers and the banks. It was on the basis
of this study that defendant corporation was actually organized and rendered operational.
Defendants Garcia and Caram, and Barretto became members of the Board and/or
officers of defendant corporation. Thus, not only the defendant corporation but all the
other defendants who were involved in the preparatory stages of the incorporation, who
caused the preparation and/or benefited from the project study and the technical services
of plaintiff must be liable. 4
It would appear from the above justification that the petitioners were not really involved
in the initial steps that finally led to the incorporation of the Filipinas Orient Airways.
Elsewhere in the decision, Barretto was described as "the moving spirit." The finding of
the respondent court is that the project study was undertaken by the private respondent at
the request of Barretto and Garcia who, upon its completion, presented it to the
petitioners to induce them to invest in the proposed airline. The study could have been
presented to other prospective investors. At any rate, the airline was eventually organized
on the basis of the project study with the petitioners as major stockholders and, together
with Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization work of
defendant corporation based on his experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock not as industrial partner but

more for his technical services that brought to fruition the defendant corporation. By the
same token, We find no reason why the plaintiff should not be similarly compensated not
only for having actively participated in the preparation of the project study for several
months and its subsequent revision but also in his having been involved in the preorganization of the defendant corporation, in the preparation of the franchise, in inviting
the interest of the financiers and in the training and screening of personnel. We agree that
for these special services of the plaintiff the amount of P50,000.00 as compensation is
reasonable. 5
The above finding bolsters the conclusion that the petitioners were not involved in the
initial stages of the organization of the airline, which were being directed by Barretto as
the main promoter. It was he who was putting all the pieces together, so to speak. The
petitioners were merely among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to invest in the proposed
airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held personally
liable for the compensation claimed by the private respondent for the services performed
by him in the organization of the corporation. To repeat, the petitioners did not contract
such services. It was only the results of such services that Barretto and Garcia presented
to them and which persuaded them to invest in the proposed airline. The most that can be
said is that they benefited from such services, but that surely is no justification to hold
them personally liable therefor. Otherwise, all the other stockholders of the corporation,
including those who came in later, and regardless of the amount of their share holdings,
would be equally and personally liable also with the petitioners for the claims of the
private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition of solidary responsibility upon the
Carams but seems to be willing, in a vague, unexpressed offer of compromise, to accept
joint liability. While it is true that it does here and there disclaim total liability, the thrust
of the petition seems to be against the imposition of solidary liability only rather than
against any liability at all, which is what it should have categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly
and severally, under the first paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at this time the rules on solidary
obligations, which the parties-needlessly, as it turns out have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under the

challenged decision, which is hereby modified accordingly. It is so ordered.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.
Gancayco, J., took no part.

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM,
respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals
in CA-G.R. CV No. 66195 which modified the decision of the then Court of 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 dismissed but in
all other respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to
pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum

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
damages.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim
is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with 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 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.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and
another P20,000.00 to Constancio B. Maglana as attorney's fees.
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.
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.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of
P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed in
good faith. The fact that the properties of the Bormaheco and the Cervanteses were
attached and that they were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect his rights, he should not
be saddled with moral or exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that ordered it, in the exercise of
its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party
defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in 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)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business
as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into

and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-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-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July
18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R.
No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor
of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare
parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in
both petitions) contributed some funds used in the purchase of the above aircrafts and
spare parts. The funds were supposed to be their contributions to a new corporation
proposed by Lim to expand his airline business. They executed two (2) separate
indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana
and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from
and against any/all damages, losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives
should or may pay or cause to be paid or become liable to pay on them of whatever kind
and nature.
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 favor of the
former. It was stipulated therein that Lim transfer and convey to the surety 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 pursuant to
the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco
and Maglana.

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 way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the trial
court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R.
No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured
its risk of liability under the surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation
to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the
amount of P298,666.28 from defendants will no longer prosper. 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.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount
from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not
even present any evidence that it is the attorney-in-fact of the reinsurance 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 must appear to be
the present real owner of the right sought to be enforced (Moran, 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 the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party
in interest is meant a present substantial interest as distinguished from a mere expectancy
or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil.
27; Oglleaby v. Springfield Marine 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).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party
in interest as it has already been paid by the reinsurer the sum of P295,000.00 the bulk
of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject 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 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 to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess
of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by
the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant
Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding
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 and in
their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the reinsurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was
never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any claim
against defendants, considering the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
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
extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words,
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their
attorney-in-fact.
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 important of
all, Pioneer has no right to institute and maintain in its own name an 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 this is so even where the name
of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
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 is the
party entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a real party in interest,
that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil.
Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23
SCRA 706, 710-714.
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
difference between the two amounts, or P3,666.28. This is the amount for which Pioneer
may sue defendants, assuming that the indemnity agreement is still valid and 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 P37,050.00, Pioneer is
still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants.
(Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect of
payment made by the reinsurers to the petitioner. Therefore, the 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 pursuant to Section 91 (should be

Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old
Time Molasses Co. C.C.A. La., 46 F 2nd 925).
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. Co., 55
S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
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
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. If the 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 loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the insurer, it
is provided in said article that the insurer is deemed subrogated to the rights 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 deficiency. Evidently,
under this legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-infact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was not
the real party in interest in the complaint and, therefore, has no cause of action against the
respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter 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, however, cite any grounds
except its allegation that respondent "Maglanas defense and evidence are certainly
incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to

substantiate its finding that the counter-indemnitors are not liable to the petitioner. The
trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, 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 here in the
Philippines. As soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have impaired and rendered
insufficient the security under the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security
for the claim sought to be enforced by this action, which necessarily means 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.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the
planes and spare parts, no longer has any further action against the defendants 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 defendants, as
indemnitors, would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines.
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.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA 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 Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser 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, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention
that Pioneer is not the vendor but JDA. The reason is that Pioneer is 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 defendants and defendant
Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
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 change
of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the remainder of
which ... shall be due and payable on the 26th day x x x of each succeeding three months
and the last of which shall be due and payable 26th May 1967.
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:
The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the remainder
of which ... shall be due and payable on the 4th day ... of each succeeding months and the
last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing 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 installments, the 15th
of each succeeding three months, that of the last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected twice,
were done without the knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed
that these defendants and defendant Maglana knew of and consented to the modification
of the obligations. But if that were so, there would have been the corresponding
documents in the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by 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. Pacheco, 55 Phil. 553, 563,
and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without the consent of 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 extension

time referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd.,
v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an 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 Pioneer from liability from the
claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer and its
surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo
of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to
do business through the corporate vehicle but who failed to 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 questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to
incorporate, a de facto partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in proportion to
their contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the petitioner as
their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in
the total amount of P184,878.74 as correctly found by the trial court, with interest from
the filing of the cross-complaints until the amount is fully paid. Defendant Lim should
pay one-half of the said amount to Bormaheco and the Cervanteses and the other one-half
to defendant Maglana. It is established in the records that defendant Lim had duly
received the amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes and spare
parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses,
hence, the total sum of P 184,878.74.
We first state the principles.
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 the
laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons
who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229,
29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together
under articles to purchase property to carry on a business, and their organization is so
defective as to come short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the company to the property
acquired by the company will be 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 corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a third the difference
in the proportionate value of the land conveyed by him, and no stock was ever issued in
the corporation, it was treated as a trustee for the associates in an action between them for
an accounting, and its capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of the property 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 partners, as between
themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied
only when necessary to do justice between the parties; thus, one who takes no part except
to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged
partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and 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 contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa
23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his

failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found through Exhibit 58, that
the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner
Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the crossclaims of the respondents to the effect that they were induced and lured by the petitioner
to make contributions to a proposed corporation which was never formed because the
petitioner reneged on their agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana
to expand his airline business. Lim was to procure two DC-3's from Japan and secure the
necessary certificates of public convenience and necessity as well as the required permits
for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of
P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt
thereof. Cervantes, likewise, delivered his share of the 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 the planes on his own account.
Since then up to the filing of this answer, Lim has refused, failed and still refuses to set
up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).
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 their
lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh.
E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance
with the plaintiff, signed and executed the alleged chattel mortgage and surety bond
agreement in his personal capacity as the alleged 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 chattel mortgage (sic) allegedly executed by
defendant Lim, thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting to an aggregate
sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted
and refused to comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily,

no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record shows
that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.

G.R. No. L-20993

September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents.
---------------------------G.R. No. L-21221

September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO., INC.,
respondents.
Amado A. Amador, Jr. for petitioner.
Atilano C. Bautista and Pompeyo F. Olivas for respondents.

ZALDIVAR, J.:
These two cases, being interrelated, are decided together.
Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review and set
aside the orders of respondent Public Service Commission, 1 dated August 20, 1962, and
February 15, 1963, in PSC Case No. 39716, cancelling and revoking the certificate of
public convenience and necessity and forfeiting the franchise of said petitioner. In the
same petition, the petitioner prayed for the issuance of a writ of preliminary injunction ex

parte suspending the effectivity of said orders and/or enjoining respondents Commission
and/or Municipality of Morong, Rizal, from enforcing in any way the cancellation and
revocation of petitioner's franchise and certificate of public convenience during the
pendency of this appeal. By resolution of March 12, 1963, this Court denied the petition
for injunction, for lack of merit.
Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and
set aside the decision of the Commission dated March 13, 1963 in PSC Case No. 62-5143
granting a certificate of public convenience and necessity to respondent Morong Electric
Co., Inc. 2 to operate an electric light, heat and power service in the municipality of
Morong, Rizal. In the petition Rizal Light & Ice Co., Inc. also prayed for the issuance of
a writ of preliminary injunction ex parte suspending the effectivity of said decision. Per
resolution of this Court, dated May 6, 1963, said petition for injunction was denied.
The facts, as they appear in the records of both cases, are as follows:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at
Morong, Rizal. On August 15, 1949, it was granted by the Commission a certificate of
public convenience and necessity for the installation, operation and maintenance of an
electric light, heat and power service in the municipality of Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to appear
before it on February 18, 1957 to show cause why it should not be penalized for violation
of the conditions of its certificate of public convenience and the regulations of the
Commission, and for failure to comply with the directives to raise its service voltage and
maintain them within the limits prescribed in the Revised Order No. 1 of the
Commission, and to acquire and install a kilowattmeter to indcate the load in kilowatts at
any particular time of the generating unit. 3
For failure of the petitioner to appear at the hearing on February 18, 1957, the
Commission ordered the cancellation and revocation of petitioner's certificate of public
convenience and necessity and the forfeiture of its franchise. Petitioner moved for
reconsideration of said order on the ground that its manager, Juan D. Francisco, was not
aware of said hearing. Respondent municipality opposed the motion alleging that
petitioner has not rendered efficient and satisfactory service and has not complied with
the requirements of the Commission for the improvement of its service. The motion was
set for hearing and Mr. Pedro S. Talavera, Chief, Industrial Division of the Commission,
was authorized to conduct the hearing for the reception of the evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for February 18, 1957
the sole basis of the revocation of petitioner's certificate was really due to the
illness of its manager, Juan D. Francisco, the Commission set aside its order of
revocation. Respondent municipality moved for reconsideration of this order of
reinstatement of the certificate, but the motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent municipality

formally asked the Commission to revoke petitioner's certificate of public convenience

and to forfeit its franchise on the ground, among other things, that it failed to comply with
the conditions of said certificate and franchise. Said petition was set for hearing jointly
with the order to show cause. The hearings had been postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and installations by
the engineers of the Commission, as follows: April 15, 1958 by Engineer Antonio M.
Alli; September 18, 1959, July 12-13, 1960, and June 21-24, 1961, by Engineer Meliton
S. Martinez. The inspection on June 21-24, 1961 was made upon the request of the
petitioner who manifested during the hearing on December 15, 1960 that improvements
have been made on its service since the inspection on July 12-13, 1960, and that, on the
basis of the inspection report to be submitted, it would agree to the submission of the case
for decision without further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear.
Respondent municipality was then allowed to present its documentary evidence, and
thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had
not been furnished with a copy of the report of the June 21-24, 1961 inspection for it to
reply as previously agreed. In an order dated August 25, 1961, petitioner was granted a
period of ten (10) days within which to submit its written reply to said inspection report,
on condition that should it fail to do so within the said period the case would be
considered submitted for decision. Petitioner failed to file the reply. In consonance with
the order of August 25, 1961, therefore, the Commission proceeded to decide the case.
On July 29, 1962 petitioner's electric plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the inspection
reports of its aforenamed engineers, found that the petitioner had failed to comply with
the directives contained in its letters dated May 21, 1954 and September 4, 1954, and had
violated the conditions of its certificate of public convenience as well as the rules and
regulations of the Commission. The Commission concluded that the petitioner "cannot
render the efficient, adequate and satisfactory electric service required by its certificate
and that it is against public interest to allow it to continue its operation." Accordingly, it
ordered the cancellation and revocation of petitioner's certificate of public convenience
and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision, alleging
that before its electric plant was burned on July 29, 1962, its service was greatly
improved and that it had still existing investment which the Commission should protect.
But eight days before said motion for reconsideration was filed, or on September 10,
1962, Morong Electric, having been granted a municipal franchise on May 6, 1962 by
respondent municipality to install, operate and maintain an electric heat, light and power
service in said municipality approved by the Provincial Board of Rizal on August 31,
1962 filed with the Commission an application for a certificate of public convenience
and necessity for said service. Said application was entitled "Morong Electric Co., Inc.,

Applicant", and docketed as Case No. 62-5143.

Petitioner opposed in writing the application of Morong Electric, alleging among other
things, that it is a holder of a certificate of public convenience to operate an electric light,
heat and power service in the same municipality of Morong, Rizal, and that the approval
of said application would not promote public convenience, but would only cause ruinous
and wasteful competition. Although the opposition is dated October 6, 1962, it was
actually received by the Commission on November 8, 1962, or twenty four days after the
order of general default was issued in open court when the application was first called for
hearing on October 15, 1962. On November 12, 1962, however, the petitioner filed a
motion to lift said order of default. But before said motion could be resolved, petitioner
filed another motion, dated January 4, 1963, this time asking for the dismissal of the
application upon the ground that applicant Morong Electric had no legal personality when
it filed its application on September 10, 1962, because its certificate of incorporation was
issued by the Securities and Exchange Commission only on October 17, 1962. This
motion to dismiss was denied by the Commission in a formal order issued on January 17,
1963 on the premise that applicant Morong Electric was a de facto corporation.
Consequently, the case was heard on the merits and both parties presented their respective
evidence. On the basis of the evidence adduced, the Commission, in its decision dated
March 13, 1963, found that there was an absence of electric service in the municipality of
Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized
and existing under the laws of the Philippines, has the financial capacity to maintain said
service. These circumstances, considered together with the denial of the motion for
reconsideration filed by petitioner in Case No. 39715 on February, 15, 1963, such that as
far as the Commission was concerned the certificate of the petitioner was already
declared revoked and cancelled, the Commission approved the application of Morong
Electric and ordered the issuance in its favor of the corresponding certificate of public
convenience and necessity.1awphl.nt
On March 8, 1963, petitioner filed with this Court a petition to review the decision in
Case No. 39715 (now G. R. No. L-20993). Then on April 26, 1963, petitioner also filed a
petition to review the decision in Case No. 62-5143 (now G. R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner contends:
(1) that the Commission acted without or in excess of its jurisdiction when it delegated
the hearing of the case and the reception of evidence to Mr. Pedro S. Talavera who is not
allowed by law to hear the same; (2) that the cancellation of petitioner's certificate of
public convenience was unwarranted because no sufficient evidence was adduced against
the petitioner and that petitioner was not able to present evidence in its defense; (3) that
the Commission failed to give protection to petitioner's investment; and (4) that the
Commission erred in imposing the extreme penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the
Commission erred in denying petitioner's motion to dismiss and proceeding with the
hearing of the application of the Morong Electric; (2) that the Commission erred in
granting Morong Electric a certificate of public convenience and necessity since it is not

financially capable to render the service; (3) that the Commission erred when it made
findings of facts that are not supported by the evidence adduced by the parties at the trial;
and (4) that the Commission erred when it did not give to petitioner protection to its
investment a reiteration of the third assignment of error in the other case.1awphl.nt
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro S.
Talavera, who conducted the hearings of the case below, is a division chief, he is not a
lawyer. As such, under Section 32 of Commonwealth Act No. 146, as amended, the
Commission should not have delegated to him the authority to conduct the hearings for
the reception of evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of
Section 32 of Commonwealth Act No. 146, as amended, 6 the Commission can only
authorize a division chief to hear and investigate a case filed before it if he is a lawyer.
However, the petitioner is raising this question for the first time in this appeal. The record
discloses that petitioner never made any objection to the authority of Mr. Talavera to hear
the case and to receive the evidence of the parties. On the contrary, we find that petitioner
had appeared and submitted evidence at the hearings conducted by Mr. Talavera,
particularly the hearings relative to the motion for reconsideration of the order of
February 18, 1957 cancelling and revoking its certificate. We also find that, through
counsel, petitioner had entered into agreements with Mr. Talavera, as hearing officer, and
the counsel for respondent municipality, regarding procedure in order to abbreviate the
proceedings. 7 It is only after the decision in the case turned out to be adverse to it that
petitioner questioned the proceedings held before Mr. Talavera.
This Court in several cases has ruled that objection to the delegation of authority to hear a
case filed before the Commission and to receive the evidence in connection therewith is a
procedural, not a jurisdictional point, and is waived by failure to interpose timely the
objection and the case had been decided by the Commission. 8 Since petitioner has never
raised any objection to the authority of Mr. Talavera before the Commission, it should be
deemed to have waived such procedural defect, and consonant with the precedents on the
matter, petitioner's claim that the Commission acted without or in excess of jurisdiction in
so authorizing Mr. Talavera should be dismissed. 9
2. Anent the second assigned error, the gist of petitioner's contention is that the evidence
consisting of inspection reports upon which the Commission based its decision is
insufficient and untrustworthy in that (1) the authors of said reports had not been put to
test by way of cross-examination; (2) the reports constitute only one side of the picture as
petitioner was not able to present evidence in its defense; (3) judicial notice was not taken
of the testimony of Mr. Harry B. Bernardino, former mayor of respondent municipality, in
PSC Case No. 625143 (the other case, G. R. No. L-21221) to the effect that the petitioner
had improved its service before its electric power plant was burned on July 29, 1962

which testimony contradicts the inspection reports; and (4) the Commission acted both as
prosecutor and judge passing judgment over the very same evidence presented by it as
prosecutor a situation "not conducive to the arrival at just and equitable decisions."
Settled is the rule that in reviewing the decision of the Public Service Commission this
Court is not required to examine the proof de novo and determine for itself whether or not
the preponderance of evidence really justifies the decision. The only function of this
Court is to determine whether or not there is evidence before the Commission upon
which its decision might reasonably be based. This Court will not substitute its discretion
for that of the Commission on questions of fact and will not interfere in the latter's
decision unless it clearly appears that there is no evidence to support it. 10 Inasmuch as
the only function of this Court in reviewing the decision of the Commission is to
determine whether there is sufficient evidence before the Commission upon which its
decision can reasonably be based, as it is not required to examine the proof de novo, the
evidence that should be made the basis of this Court's determination should be only those
presented in this case before the Commission. What then was the evidence presented
before the Commission and made the basis of its decision subject of the present appeal?
As stated earlier, the Commission based its decision on the inspection reports submitted
by its engineers who conducted the inspection of petitioner's electric service upon orders
of the Commission. 11 Said inspection reports specify in detail the deficiencies incurred,
and violations committed, by the petitioner resulting in the inadequacy of its service. We
consider that said reports are sufficient to serve reasonably as bases of the decision in
question. It should be emphasized, in this connection that said reports, are not mere
documentary proofs presented for the consideration of the Commission, but are the
results of the Commission's own observations and investigations which it can rightfully
take into consideration, 12 particularly in this case where the petitioner had not presented
any evidence in its defense, and speaking of petitioner's failure to present evidence, as
well as its failure to cross-examine the authors of the inspection reports, petitioner should
not complain because it had waived not only its right to cross-examine but also its right to
present evidence. Quoted hereunder are the pertinent portions of the transcripts of the
proceedings where the petitioner, through counsel, manifested in clear language said
waiver and its decision to abide by the last inspection report of Engineer Martinez:
Proceedings of December 15, 1960
COMMISSION:
It appears at the last hearing of this case on September 23, 1960, that an engineer of this
Commission has been ordered to make an inspection of all electric services in the
province of Rizal and on that date the engineer of this Commission is still undertaking
that inspection and it appears that the said engineer had actually made that inspection on
July 12 and 13, 1960. The engineer has submitted his report on November 18, 1960
which is attached to the records of this case.
ATTY. LUQUE (Councel for Petitioner):

... (W)e respectfully state that while the report is, as I see it attached to the records, clear
and very thorough, it was made sometime July of this year and I understand from the
respondent that there is some improvement since this report was made ... we respectfully
request that an up-to-date inspection be made ... . An inspector of this Commission can be
sent to the plant and considering that the engineer of this Commission, Engineer Meliton
Martinez, is very acquainted to the points involved we pray that his report will be used by
us for the reason that he is a technical man and he knows well as he has done a good job
and I think our proposition would expedite the matter. We sincerely believe that the
inspection report will be the best evidence to decide this matter.
xxx

xxx

xxx

ATTY. LUQUE:
... This is a very important matter and to show the good faith of respondent in this case
we will not even cross-examine the engineer when he makes a new report. We will agree
to the findings and, your honor please, considering as we have manifested before that
Engineer Martinez is an experienced engineer of this Commission and the points reported
by Engineer Martinez on the situation of the plant now will prevent the necessity of
having a hearing, of us bringing new evidence and complainant bringing new evidence. ...
.
xxx

xxx

xxx

COMMISSION (to Atty. Luque):

Q
Does the Commission understand from the counsel for applicant that if the
motion is granted he will submit this order to show cause for decision without any further
hearing and the decision will be based on the report of the engineer of this Commission?
A
We respectfully reply in this manner that we be allowed or be given an
opportunity just to read the report and 99%, we will agree that the report will be the basis
of that decision. We just want to find out the contents of the report, however, we request
that we be furnished with a copy of the report before the hearing so that we will just make
a manifestation that we will agree.
COMMISSION (to Atty. Luque):
Q
In order to prevent the delay of the disposition of this case the Commission will
allow counsel for the applicant to submit his written reply to the report that the engineer
of this Commission. Will he submit this case without further hearing upon the receipt of
that written reply?
A

Yes, your honor.

Proceedings of August 25, 1961

ATTY. LUQUE (Counsel for petitioner):

In order to avoid any delay in the consideration of this case we are respectfully move
(sic) that instead of our witnesses testifying under oath that we will submit a written reply
under oath together with the memorandum within fifteen (15) days and we will furnish a
copy and upon our submission of said written reply under oath and memorandum we
consider this case submitted. This suggestion is to abbreviate the necessity of presenting
witnesses here which may prolong the resolution of this case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the action to
reopen the case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully submit to this
Commission our motion to submit a written reply together with a memorandum. Also as
stated to expedite the case and to avoid further hearing we will just submit our written
reply. According to our records we are furnished with a copy of the report of July 17,
1961. We submit your honor.
xxx

xxx

xxx

COMMISSION:
To give applicant a chance to have a day in court the Commission grants the request of
applicant that it be given 10 days within which to submit a written reply on the report of
the engineer of the Commission who inspected the electric service, in the municipality of
Morong, Rizal, and after the submission of the said written reply within 10 days from
today this case will be considered submitted for decision.
The above-quoted manifestation of counsel for the petitioner, specifically the statement
referring to the inspection report of Engineer Martinez as the "best evidence to decide this
matter," can serve as an argument against petitioner's claim that the Commision should
have taken into consideration the testimony of Mr. Bernardino. But the primary reasons
why the Commission could not have taken judicial cognizance of said testimony are:
first, it is not a proper subject of judicial notice, as it is not a "known" fact that is, well
established and authoritatively settled, without qualification and contention; 13 second, it
was given in a subsequent and distinct case after the petitioner's motion for
reconsideration was heard by the Commission en banc and submitted for decision, 14 and
third, it was not brought to the attention of the Commission in this case through an
appropriate pleading. 15
Regarding the contention of petitioner that the Commission had acted both as prosecutor

and judge, it should be considered that there are two matters that had to be decided in this
case, namely, the order to show cause dated December 19, 1956, and the petition or
complaint by respondent municipality dated June 25, 1958. Both matters were heard
jointly, and the record shows that respondent municipality had been allowed to present its
evidence to substantiate its complaint. It can not be said, therefore, that in this case the
Commission had acted as prosecutor and judge. But even assuming, for the sake of
argument, that there was a commingling of the prosecuting and investigating functions,
this exercise of dual function is authorized by Section 17(a) of Commonwealth Act No.
146, as amended, under which the Commission has power "to investigate, upon its own
initiative or upon complaint in writing, any matter concerning any public service as
regards matters under its jurisdiction; to, require any public service to furnish safe,
adequate, and proper service as the public interest may require and warrant; to enforce
compliance with any standard, rule, regulation, order or other requirement of this Act or
of the Commission ... ." Thus, in the case of Collector of Internal Revenue vs. Estate of F.
P. Buan, L-11438, July 31, 1958, this Court held that the power of the Commission to
cancel and revoke a certificate of public convenience and necessity may be exercised by
it even without a formal charge filed by any interested party, with the only limitation that
the holder of the certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties are delegated
by statute to an administrative body, as in the case of the Public Service Commission,
said body may take steps it believes appropriate for the proper exercise of said duties,
particularly in the manner of informing itself whether there is probable violation of the
law and/or its rules and regulations. It may initiate an investigation, file a complaint, and
then try the charge as preferred. So long as the respondent is given a day in court, there
can be no denial of due process, and objections to said procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-investment rule"
enunciated by this Court in Batangas Transportation Co. vs. Orlanes 16 in this wise:
The Government having taken over the control and supervision of all public utilities, so
long as an operator under a prior license complies with the terms and conditions of his
license and reasonable rules and regulations for its operation and meets the reasonable
demands of the public, it is the duty of the Commission to protect rather than to destroy
his investment by the granting of the second license to another person for the same thing
over the same route of travel. The granting of such a license does not serve its
convenience or promote the interests of the public.
The above-quoted rule, however, is not absolute, for nobody has exclusive right to secure
a franchise or a certificate of public convenience. 17 Where, as in the present case, it has
been shown by ample evidence that the petitioner, despite ample time and opportunity
given to it by the Commission, had failed to render adequate, sufficient and satisfactory
service and had violated the important conditions of its certificate as well as the directives
and the rules and regulations of the Commission, the rule cannot apply. To apply that rule
unqualifiedly is to encourage violation or disregard of the terms and conditions of the
certificate and the Commission's directives and regulations, and would close the door to

other applicants who could establish, operate and provide adequate, efficient and
satisfactory service for the benefit and convenience of the inhabitants. It should be
emphasized that the paramount consideration should always be the public interest and
public convenience. The duty of the Commission to protect investment of a public utility
operator refers only to operators of good standing those who comply with the laws,
rules and regulations and not to operators who are unconcerned with the public
interest and whose investments have failed or deteriorated because of their own fault. 18
4. The last assignment of error assails the propriety of the penalty imposed by the
Commission on the petitioner that is, the revocation of the certificate and the forfeiture
of the franchise. Petitioner contends that the imposition of a fine would have been
sufficient, as had been done by the Commission in cases of a similar nature.
It should be observed that Section 16(n) of Commonwealth Act No. 146, as amended,
confers upon the Commission ample power and discretion to order the cancellation and
revocation of any certificate of public convenience issued to an operator who has
violated, or has willfully and contumaciously refused to comply with, any order, rule or
regulation of the Commission or any provision of law. What matters is that there is
evidence to support the action of the Commission. In the instant case, as shown by the
evidence, the contumacious refusal of the petitioner since 1954 to comply with the
directives, rules and regulations of the Commission, its violation of the conditions of its
certificate and its incapability to comply with its commitment as shown by its inadequate
service, were the circumstances that warranted the action of the Commission in not
merely imposing a fine but in revoking altogether petitioner's certificate. To allow
petitioner to continue its operation would be to sacrifice public interest and convenience
in favor of private interest.
A grant of a certificate of public convenience confers no property rights but is a mere
license or privilege, and such privilege is forfeited when the grantee fails to comply with
his commitments behind which lies the paramount interest of the public, for public
necessity cannot be made to wait, nor sacrificed for private convenience. (Collector of
Internal Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago Sambrano, et al. v.
PSC, et al., L-11439 & L-11542-46, July 31, 1958)
(T)he Public Service Commission, ... has the power to specify and define the terms and
conditions upon which the public utility shall be operated, and to make reasonable rules
and regulations for its operation and the compensation which the utility shall receive for
its services to the public, and for any failure to comply with such rules and regulations or
the violation of any of the terms and conditions for which the license was granted, the
Commission has ample power to enforce the provisions of the license or even to revoke
it, for any failure or neglect to comply with any of its terms and provisions. (Batangas
Trans. Co. v. Orlanes, 52 Phil. 455, 460; emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as
amended, which provides that a public utility operator violating or failing to comply with
the terms and conditions of any certificate, or any orders, decisions or regulations of the

Commission, shall be subject to a fine and that the Commission is authorized and
empowered to impose such fine, after due notice and hearing. It should be noted,
however, that the last sentence of said section states that the remedy provided therein
"shall not be a bar to, or affect any other remedy provided in this Act but shall be
cumulative and additional to such remedy or remedies." In other words, the imposition of
a fine may only be one of the remedies which the Commission may resort to, in its
discretion. But that remedy is not exclusive of, or has preference over, the other remedies.
And this Court will not substitute its discretion for that of the Commission, as long as
there is evidence to support the exercise of that discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any certificate may
be granted, authorizing the operation of a public service, three requisites must be
complied with, namely: (1) the applicant must be a citizen of the Philippines or of the
United States, or a corporation or co-partnership, association or joint-stock company
constituted and organized under the laws of the Philippines, sixty per centum at least of
the stock or paid-up capital of which belongs entirely to citizens of the Philippines or of
the United States; 19 (2) the applicant must be financially capable of undertaking the
proposed service and meeting the responsibilities incident to its operation; 20 and (3) the
applicant must prove that the operation of the public service proposed and the
authorization to do business will promote the public interest in a proper and suitable
manner. 21
As stated earlier, in the decision appealed from, the Commission found that Morong
Electric is a corporation duly organized and existing under the laws of the Philippines, the
stockholders of which are Filipino citizens, that it is financially capable of operating an
electric light, heat and power service, and that at the time the decision was rendered there
was absence of electric service in Morong, Rizal. While the petitioner does not dispute
the need of an electric service in Morong, Rizal, 22 it claims, in effect, that Morong
Electric should not have been granted the certificate of public convenience and necessity
because (1) it did not have a corporate personality at the time it was granted a franchise
and when it applied for said certificate; (2) it is not financially capable of undertaking an
electric service, and (3) petitioner was rendering efficient service before its electric plant
was burned, and therefore, being a prior operator its investment should be protected and
no new party should be granted a franchise and certificate of public convenience and
necessity to operate an electric service in the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells
on the proposition that since a franchise is a contract, 23 at least two competent parties
are necessary to the execution thereof, and parties are not competent except when they
are in being. Hence, it is contended that until a corporation has come into being, in this
jurisdiction, by the issuance of a certificate of incorporation by the Securities and
Exchange Commission (SEC) it cannot enter into any contract as a corporation. The
certificate of incorporation of the Morong Electric was issued by the SEC on October 17,
1962, so only from that date, not before, did it acquire juridical personality and legal

existence. Petitioner concludes that the franchise granted to Morong Electric on May 6,
1962 when it was not yet in esse is null and void and cannot be the subject of the
Commission's consideration. On the other hand, Morong Electric argues, and to which
argument the Commission agrees, that it was a de facto corporation at the time the
franchise was granted and, as such, it was not incapacitated to enter into any contract or
to apply for and accept a franchise. Not having been incapacitated, Morong Electric
maintains that the franchise granted to it is valid and the approval or disapproval thereof
can be properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality on May
6, 1962 when a municipal franchise was granted to it is correct. The juridical personality
and legal existence of Morong Electric began only on October 17, 1962 when its
certificate of incorporation was issued by the SEC. 24 Before that date, or pending the
issuance of said certificate of incorporation, the incorporators cannot be considered as de
facto corporation. 25 But the fact that Morong Electric had no corporate existence on the
day the franchise was granted in its name does not render the franchise invalid, because
later Morong Electric obtained its certificate of incorporation and then accepted the
franchise in accordance with the terms and conditions thereof. This view is sustained by
eminent American authorities. Thus, McQuiuin says:
The fact that a company is not completely incorporated at the time the grant is made to it
by a municipality to use the streets does not, in most jurisdictions, affect the validity of
the grant. But such grant cannot take effect until the corporation is organized. And in
Illinois it has been decided that the ordinance granting the franchise may be presented
before the corporation grantee is fully organized, where the organization is completed
before the passage and acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12,
Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is organized, the
franchise may, nevertheless, be applied for before the company is fully organized.
A grant of a street franchise is valid although the corporation is not created until
afterwards. (Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction of the
ordinance. It is enough that organization is complete prior to the passage and acceptance
of the ordinance. The reason is that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms and conditions.
(Thompson on Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26

The incorporation of Morong Electric on October 17, 1962 and its acceptance of the
franchise as shown by its action in prosecuting the application filed with the Commission
for the approval of said franchise, not only perfected a contract between the respondent
municipality and Morong Electric but also cured the deficiency pointed out by the
petitioner in the application of Morong EIectric. Thus, the Commission did not err in
denying petitioner's motion to dismiss said application and in proceeding to hear the
same. The efficacy of the franchise, however, arose only upon its approval by the
Commission on March 13, 1963. The reason is that
Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to
grant electric franchises, subject to the approval of the provincial board and the President.
However, under Section 16(b) of Commonwealth Act No. 146, as amended, the Public
Service Commission is empowered "to approve, subject to constitutional limitations any
franchise or privilege granted under the provisions of Act No. 667, as amended by Act
No. 1022, by any political subdivision of the Philippines when, in the judgment of the
Commission, such franchise or privilege will properly conserve the public interests and
the Commission shall in so approving impose such conditions as to construction,
equipment, maintenance, service, or operation as the public interests and convenience
may reasonably require, and to issue certificates of public convenience and necessity
when such is required or provided by any law or franchise." Thus, the efficacy of a
municipal electric franchise arises, therefore, only after the approval of the Public Service
Commission. (Almendras vs. Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted to Morong
Electric is not incompatible with the holding of this Court in Cagayan Fishing
Development Co., Inc. vs. Teodoro Sandiko 27 upon which the petitioner leans heavily in
support of its position. In said case this Court held that a corporation should have a full
and complete organization and existence as an entity before it can enter into any kind of a
contract or transact any business. It should be pointed out, however, that this Court did
not say in that case that the rule is absolute or that under no circumstances may the acts of
promoters of a corporation be ratified or accepted by the corporation if and when
subsequently organized. Of course, there are exceptions. It will be noted that American
courts generally hold that a contract made by the promoters of a corporation on its behalf
may be adopted, accepted or ratified by the corporation when organized. 28
2. The validity of the franchise and the corporate personality of Morong Electric to accept
the same having been shown, the next question to be resolved is whether said company
has the financial qualification to operate an electric light, heat and power service.
Petitioner challenges the financial capability of Morong Electric, by pointing out the
inconsistencies in the testimony of Mr. Jose P. Ingal, president of said company, regarding
its assets and the amount of its initial investment for the electric plant. In this connection
it should be stated that on the basis of the evidence presented on the matter, the
Commission has found the Morong Electric to be "financially qualified to install,
maintain and operate the proposed electric light, heat and power service." This is
essentially a factual determination which, in a number of cases, this Court has said it will
not disturb unless patently unsupported by evidence. An examination of the record of this

case readily shows that the testimony of Mr. Ingal and the documents he presented to
establish the financial capability of Morong Electric provide reasonable grounds for the
above finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings and conclusions of
fact made by the Public Service Commission, after weighing the evidence adduced by the
parties in a public service case, will not be disturbed by the Supreme Court unless those
findings and conclusions appear not to be reasonably supported by evidence. (La
Mallorca and Pampanga Bus Co. vs. Mercado, L-19120, November 29, 1965)
For purposes of appeal, what is decisive is that said testimonial evidence provides
reasonable support for the Public Service Commission's findings of financial capacity on
the part of applicants, rendering such findings beyond our power to disturb. (Del Pilar
Transit vs. Silva, L-21547, July 15, 1966)
It may be worthwhile to mention in this connection that per inspection report dated
January 20, 1964 29 of Mr. Meliton Martinez of the Commission, who inspected the
electric service of Morong on January 15-16, 1964, Morong Electric "is serving electric
service to the entire area covered by its approved plan and has constructed its line in
accordance with the plans and specifications approved by the Commission." By reason
thereof, it was recommended that the requests of Morong Electric (1) for the withdrawal
of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines, and (2) for
the approval of Resolution No. 160 of the Municipal Council of Morong, Rizal,
exempting the operator from making the additional P9,000.00 deposit mentioned in its
petition, dated September 16, 1963, be granted. This report removes any doubt as to the
financial capability of Morong Electric to operate and maintain an electric light, heat and
power service.
3. With the financial qualification of Morong Electric beyond doubt, the remaining
question to be resolved is whether, or not, the findings of fact of the Commission
regarding petitioner's service are supported by evidence. It is the contention of the
petitioner that the Commission made some findings of fact prejudicial to its position but
which do not find support from the evidence presented in this case. Specifically,
petitioner refers to the statements or findings that its service had "turned from bad to
worse," that it miserably failed to comply with the oft-repeated promises to bring about
the needed improvement, that its equipment is unserviceable, and that it has no longer
any plant site and, therefore, has discredited itself. Petitioner further states that such
statements are not only devoid of evidentiary support but contrary to the testimony of its
witness, Mr. Harry Bernardino, who testified that petitioner was rendering efficient and
satisfactory service before its electric plant was burned on July 29, 1962.
On the face of the decision appealed from, it is obvious that the Commission in
describing the kind of service petitioner was rendering before its certificate was ordered
revoked and cancelled, took judicial notice of the records of the previous case (PSC Case
No. 39715) where the quality of petitioner's service had been squarely put in issue. It will
be noted that the findings of the Commission were made notwithstanding the fact that the

aforementioned testimony of Mr. Bernardino had been emphasized and pointed out in
petitioner's Memorandum to the Commission. 30 The implication is simple: that as
between the testimony of Mr. Bernardino and the inspection reports of the engineers of
the Commission, which served as the basis of the revocation order, the Commission gave
credence to the latter. Naturally, whatever conclusion or finding of fact that the
Commission arrived at regarding the quality of petitioner's service are not borne out by
the evidence presented in this case but by evidence in the previous case. 31 In this
connection, we repeat, the conclusion, arrived at by the Commission after weighing the
conflicting evidence in the two related cases, is a conclusion of fact which this Court will
not disturb.
And it has been held time and again that where the Commission has reached a conclusion
of fact after weighing the conflicting evidence, that conclusion must be respected, and the
Supreme Court will not interfere unless it clearly appears that there is no evidence to
support the decision of the Commission. (La Mallorca and Pampanga Bus Co., Inc. vs.
Mercado, L-19120, November 29, 1965 citing Pangasinan Trans. Co., Inc. vs. Dela Cruz,
96 Phil. 278)
For that matter, petitioner's pretension that it has a prior right to the operation of an
electric service in Morong, Rizal, is not tenable; and its plea for protection of its
investment, as in the previous case, cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed from,
should be, as they are hereby affirmed, with costs in the two cases against petitioner Rizal
Light & Ice Co., Inc. It is so ordered.

SECOND DIVISION
[G.R. No. 131394. March 28, 2005]
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES,
petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO
III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE
SCHOOL, INC., respondents.
DECISION
TINGA, J.:
Presented in the case at bar is the apparently straight-forward but complicated question:
What should be the basis of quorum for a stockholders meetingthe outstanding capital
stock as indicated in the articles of incorporation or that contained in the companys stock
and transfer book?

Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 41473[1]
promulgated on 18 August 1997, affirming the SEC Order dated 20 June 1996, and the
Resolution[2] of the Court of Appeals dated 31 October 1997 which denied petitioners
motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with
seven hundred (700) founders shares and seventy-six (76) common shares as its initial
capital stock subscription reflected in the articles of incorporation. However, private
respondents and their predecessors who were in control of PMMSI registered the
companys stock and transfer book for the first time in 1978, recording thirty-three (33)
common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979,
a special stockholders meeting was called and held on the basis of what was considered
as a quorum of twenty-seven (27) common shares, representing more than two-thirds
(2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with
the Securities and Exchange Commission (SEC) for the registration of their property
rights over one hundred (120) founders shares and twelve (12) common shares owned by
their father. The SEC hearing officer held that the heirs of Acayan were entitled to the
claimed shares and called for a special stockholders meeting to elect a new set of officers.
[3] The SEC En Banc affirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors.
Private respondents thereafter filed a petition with the SEC questioning the validity of the
06 May 1992 stockholders meeting, alleging that the quorum for the said meeting should
not be based on the 165 issued and outstanding shares as per the stock and transfer book,
but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was dismissed.[4] Appeal was
made to the SEC En Banc, which granted said appeal, holding that the shares of the
deceased incorporators should be duly represented by their respective administrators or
heirs concerned. The SEC directed the parties to call for a stockholders meeting on the
basis of the stockholdings reflected in the articles of incorporation for the purpose of
electing a new set of officers for the corporation.[5]
Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of
Appeals.[6] Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes,
stockholders and directors of PMMSI, earlier filed another petition for review of the same
SEC En Bancs orders. The petitions were thereafter consolidated.[7] The consolidated
petitions essentially raised the following issues, viz: (a) whether the basis the outstanding
capital stock and accordingly also for determining the quorum at stockholders meetings it
should be the 1978 stock and transfer book or if it should be the 1952 articles of
incorporation; and (b) whether the Court of Appeals gravely erred in applying the Espejo
Decision to the benefit of respondents.[8] The Espejo Decision is the decision of the SEC

en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan
in the stock and transfer book.
The Court of Appeals held that for purposes of transacting business, the quorum should
be based on the outstanding capital stock as found in the articles of incorporation.[9] As
to the second issue, the Court of Appeals held that the ruling in the Acayan case would
ipso facto benefit the private respondents, since to require a separate judicial declaration
to recognize the shares of the original incorporators would entail unnecessary delay and
expense. Besides, the Court of Appeals added, the incorporators have already proved their
stockholdings through the provisions of the articles of incorporation.[10]
In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and
legal. They submit that reliance on the 1952 articles of incorporation for determining the
quorum negates the existence and validity of the stock and transfer book which private
respondents themselves prepared. In addition, they posit that private respondents cannot
avail of the benefits secured by the heirs of Acayan, as private respondents must show
and prove entitlement to the founders and common shares in a separate and independent
action/proceeding.
In private respondents Memorandum[11] dated 08 March 2000, they point out that the
instant petition raises the same facts and issues as those raised in G.R. No. 131315[12],
which was denied by the First Division of this Court on 18 January 1999 for failure to
show that the Court of Appeals committed any reversible error. They add that as a logical
consequence, the instant petition should be dismissed on the ground of res judicata.
Furthermore, private respondents claim that in view of the applicability of the rule on res
judicata, petitioners counsel should be cited for contempt for violating the rule against
forum-shopping.[13]
For their part, petitioners claim that the principle of res judicata does not apply to the
instant case. They argue that the instant petition is separate and distinct from G.R. No.
131315, there being no identity of parties, and more importantly, the parties in the two
petitions have their own distinct rights and interests in relation to the subject matter in
litigation. For the same reasons, they claim that counsel for petitioners cannot be found
guilty of forum-shopping.[14]
In their Manifestation and Motion[15] dated 22 September 2004, private respondents
moved for the dismissal of the instant petition in view of the dismissal of G.R. No.
131315. Attached to the said manifestation is a copy of the Entry of Judgment[16] issued
by the First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in
G.R. No. 131315 it fails to impute reversible error to the challenged Court of Appeals
Decision.
Res judicata does not apply in
the case at bar.

Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or
matter settled by judgment.[17] The doctrine of res judicata provides that a final
judgment, on the merits rendered by a court of competent jurisdiction is conclusive as to
the rights of the parties and their privies and constitutes an absolute bar to subsequent
actions involving the same claim, demand, or cause of action.[18] The elements of res
judicata are (a) identity of parties or at least such as representing the same interest in both
actions; (b) identity of rights asserted and relief prayed for, the relief being founded on
the same facts; and (c) the identity in the two (2) particulars is such that any judgment
which may be rendered in the other action will, regardless of which party is successful,
amount to res judicata in the action under consideration.[19]
There is no dispute as to the identity of subject matter since the crucial point in both cases
is the propriety of including the still unproven shares of respondents for purposes of
determining the quorum. Petitioners, however, deny that there is identity of parties and
causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain
whether the same facts or evidence would support and establish the former and present
causes of action.[20] More significantly, there is identity of causes of action when the
judgment sought will be inconsistent with the prior judgment.[21] In both petitions,
petitioners assert that the Court of Appeals Decision effectively negates the existence and
validity of the stock and transfer book, as well as automatically grants private
respondents shares of stocks which they do not own, or the ownership of which remains
to be unproved. Petitioners in the two petitions rely on the entries in the stock and transfer
book as the proper basis for computing the quorum, and consequently determine the
degree of control one has over the company. Essentially, the affirmance of the SEC Order
had the effect of diminishing their control and interests in the company, as it allowed the
participation of the individual private respondents in the election of officers of the
corporation.
Absolute identity of parties is not a condition sine qua non for res judicata to applya
shared identity of interest is sufficient to invoke the coverage of the principle.[22]
However, there is no identity of parties between the two cases. The parties in the two
petitions have their own rights and interests in relation to the subject matter in litigation.
As stated by petitioners in their Reply to Respondents Memorandum,[23] there are no
two separate actions filed, but rather, two separate petitions for review on certiorari filed
by two distinct parties with the Court and represented by their own counsels, arising from
an adverse consolidated decision promulgated by the Court of Appeals in one action or
proceeding.[24] As such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the
rules against forum-shopping. In the Verification/Certification[25] portion of the petition,
petitioners clearly stated that there was then a pending motion for reconsideration of the
18 August 1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R. SP
No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for

clarification. Moreover, the records indicate that petitioners filed their Manifestation[26]
dated 20 January 1998, informing the Court of their receipt of the petition in G.R. No.
131315 in compliance with their duty to inform the Court of the pendency of another
similar petition. The Court finds that petitioners substantially complied with the rules
against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and
arguments as those in G.R. No. 131315 which the First Division has long denied with
finality. The First Division found the petition before it inadequate in failing to raise any
reversible error on the part of the Court of Appeals. We reach a similar conclusion as
regards the present petition.
The crucial issue in this case is whether it is the companys stock and transfer book, or its
1952 Articles of Incorporation, which determines stockholders shareholdings, and
provides the basis for computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the charter of the
corporation and the contractual relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its stockholders.[27] When
PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as The
Corporation Law. Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of
the Philippines, may form a private corporation for any lawful purpose or purposes by
filing with the Securities and Exchange Commission articles of incorporation duly
executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the
Philippines, and the number of shares into which it is divided, and if such stock be in
whole or in part without par value then such fact shall be stated; Provided, however, That
as to stock without par value the articles of incorporation need only state the number of
shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par
stock actually subscribed, the amount or number of shares of no-par stock subscribed by
each and the sum paid by each on his subscription. . . .[28]
A review of PMMSIs articles of incorporation[29] shows that the corporation complied
with the requirements laid down by Act No. 1459. It provides in part:

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS
(P90,000.00) divided into two classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
....
8. That the amount of the entire capital stock which has been actually subscribed is
TWENTY ONE THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following
persons have subscribed for the number of shares and amount of capital stock set out after
their respective names:
SUBSCRIBER
SUBSCRIBED
AMOUNT SUBSCRIBED

No. of Shares
Par Value
Crispulo J. Onrubia
120 Founders
P 2,400.00
Juan H. Acayan
120 "
2, 400.00
Martin P. Sagarbarria
100 "
2, 000.00
Mauricio G. Gallaga

50 "
1, 000.00
Luis Renteria
50 "
1, 000.00
Faustina M. de Onrubia
140 "
2, 800.00
Mrs. Ramon Araneta
40 "
800.00
Carlos M. Onrubia
80 "
1,600.00

700
P 14,000.00

SUBSCRIBER
SUBSCRIBED
No. of Shares
AMOUNT SUBSCRIBED
Par Value

Crispulo J. Onrubia
12 Common
P 1,200.00
Juan H. Acayan
12 "
1,200.00
Martin P. Sagarbarria
8"
800.00
Mauricio G. Gallaga
8"
800.00
Luis Renteria
8"
800.00
Faustina M. de Onrubia
12 "
1,200.00
Mrs. Ramon Araneta
8"
800.00
Carlos M. Onrubia

8"
800.00

76
P 7,600.00[30]
There is no gainsaying that the contents of the articles of incorporation are binding, not
only on the corporation, but also on its shareholders. In the instant case, the articles of
incorporation indicate that at the time of incorporation, the incorporators were bona fide
stockholders of seven hundred (700) founders shares and seventy-six (76) common
shares. Hence, at that time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and
addresses of all stockholders arranged alphabetically, the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment thereof; a
statement of every alienation, sale or transfer of stock made, the date thereof and by and
to whom made; and such other entries as may be prescribed by law.[31] A stock and
transfer book is necessary as a measure of precaution, expediency and convenience since
it provides the only certain and accurate method of establishing the various corporate acts
and transactions and of showing the ownership of stock and like matters.[32] However, a
stock and transfer book, like other corporate books and records, is not in any sense a
public record, and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein.[33] In fact, it is generally held that the records
and minutes of a corporation are not conclusive even against the corporation but are
prima facie evidence only,[34] and may be impeached or even contradicted by other
competent evidence.[35] Thus, parol evidence may be admitted to supply omissions in
the records or explain ambiguities, or to contradict such records.[36]
In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the
Philippines supplanted Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there
must be present, either in person or by representative authorized to act by written proxy,
the owners of a majority of the outstanding capital stock, or if there be no capital stock, a
majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the bylaws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or majority of the members in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined. The term outstanding capital stock as used in
this code, means the total shares of stock issued to subscribers or stockholders whether or
not fully or partially paid (as long as there is binding subscription agreement) except
treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and
issued, whether it be founders shares or common shares.[37] In the instant case, two
figures are being pitted against each other those contained in the articles of incorporation,
and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate
stock and transfer book, and completely disregarding the issued and outstanding shares as
indicated in the articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The stock and transfer
book of PMMSI cannot be used as the sole basis for determining the quorum as it does
not reflect the totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and outstanding as
compared to that listed in the stock and transfer book. As aptly stated by the SEC in its
Order dated 15 July 1996:[38]
It is to be explained, that if at the onset of incorporation a corporation has 771 shares
subscribed, the Stock and Transfer Book should likewise reflect 771 shares. Any sale,
disposition or even reacquisition of the company of its own shares, in which it becomes
treasury shares, would not affect the total number of shares in the Stock and Transfer
Book. All that will change are the entries as to the owners of the shares but not as to the
amount of shares already subscribed.
This is precisely the reason why the Stock and Transfer Book was not given probative
value. Did the shares, which were not recorded in the Stock and Transfer Book, but were
recorded in the Articles of Iincorporation just vanish into thin air? . . . .[39]
As shown above, at the time the corporation was set-up, there were already seven
hundred seventy-six (776) issued and outstanding shares as reflected in the articles of
incorporation. No proof was adduced as to any transaction effected on these shares from
the time PMMSI was incorporated up to the time the instant petition was filed, except for
the thirty-three (33) shares which were recorded in the stock and transfer book in 1978,
and the additional one hundred thirty-two (132) in 1982. But obviously, the shares so
ordered recorded in the stock and transfer book are among the shares reflected in the
articles of incorporation as the shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation
merely because the corporate officers failed to keep its records accurately.[40] A
corporations records are not the only evidence of the ownership of stock in a corporation.
[41] In an American case,[42] persons claiming shareholders status in a professional

corporation were listed as stockholders in the amendment to the articles of incorporation.

On that basis, they were in all respects treated as shareholders. In fact, the acts and
conduct of the parties may even constitute sufficient evidence of ones status as a
shareholder or member.[43] In the instant case, no less than the articles of incorporation
declare the incorporators to have in their name the founders and several common shares.
Thus, to disregard the contents of the articles of incorporation would be to pretend that
the basic document which legally triggered the creation of the corporation does not exist
and accordingly to allow great injustice to be caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals gravely erred in applying the Espejo decision
to the benefit of respondents. The Court believes that the more precise statement of the
issue is whether in its assailed Decision, the Court of Appeals can declare private
respondents as the heirs of the incorporators, and consequently register the founders
shares in their name. However, this issue as recast is not actually determinative of the
present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of
their shares in PMMSI as recorded in the stock and transfer book and instantly created
inexistent shares in favor of private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the
shares of the original incorporators would entail unnecessary delay and expense on the
part of the litigants, considering that the incorporators had already proved ownership of
such shares as shown in the articles of incorporation.[44] There was no declaration of
who the individual owners of these shares were on the date of the promulgation of the
Decision. As properly stated by the SEC in its Order dated 20 June 1996, to which the
appellate courts Decision should be related, if at all, the ownership of these shares should
only be subjected to the proper judicial (probate) or extrajudicial proceedings in order to
determine the respective shares of the legal heirs of the deceased incorporators.[45]
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs
against petitioners.
SO ORDERED.

SECOND DIVISION
[G.R. No. 131394. March 28, 2005]
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES,
petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO
III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE
SCHOOL, INC., respondents.
DECISION

TINGA, J.:
Presented in the case at bar is the apparently straight-forward but complicated question:
What should be the basis of quorum for a stockholders meetingthe outstanding capital
stock as indicated in the articles of incorporation or that contained in the companys stock
and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 41473[1]
promulgated on 18 August 1997, affirming the SEC Order dated 20 June 1996, and the
Resolution[2] of the Court of Appeals dated 31 October 1997 which denied petitioners
motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with
seven hundred (700) founders shares and seventy-six (76) common shares as its initial
capital stock subscription reflected in the articles of incorporation. However, private
respondents and their predecessors who were in control of PMMSI registered the
companys stock and transfer book for the first time in 1978, recording thirty-three (33)
common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979,
a special stockholders meeting was called and held on the basis of what was considered
as a quorum of twenty-seven (27) common shares, representing more than two-thirds
(2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with
the Securities and Exchange Commission (SEC) for the registration of their property
rights over one hundred (120) founders shares and twelve (12) common shares owned by
their father. The SEC hearing officer held that the heirs of Acayan were entitled to the
claimed shares and called for a special stockholders meeting to elect a new set of officers.
[3] The SEC En Banc affirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors.
Private respondents thereafter filed a petition with the SEC questioning the validity of the
06 May 1992 stockholders meeting, alleging that the quorum for the said meeting should
not be based on the 165 issued and outstanding shares as per the stock and transfer book,
but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was dismissed.[4] Appeal was
made to the SEC En Banc, which granted said appeal, holding that the shares of the
deceased incorporators should be duly represented by their respective administrators or
heirs concerned. The SEC directed the parties to call for a stockholders meeting on the
basis of the stockholdings reflected in the articles of incorporation for the purpose of
electing a new set of officers for the corporation.[5]
Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of
Appeals.[6] Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes,

stockholders and directors of PMMSI, earlier filed another petition for review of the same
SEC En Bancs orders. The petitions were thereafter consolidated.[7] The consolidated
petitions essentially raised the following issues, viz: (a) whether the basis the outstanding
capital stock and accordingly also for determining the quorum at stockholders meetings it
should be the 1978 stock and transfer book or if it should be the 1952 articles of
incorporation; and (b) whether the Court of Appeals gravely erred in applying the Espejo
Decision to the benefit of respondents.[8] The Espejo Decision is the decision of the SEC
en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan
in the stock and transfer book.
The Court of Appeals held that for purposes of transacting business, the quorum should
be based on the outstanding capital stock as found in the articles of incorporation.[9] As
to the second issue, the Court of Appeals held that the ruling in the Acayan case would
ipso facto benefit the private respondents, since to require a separate judicial declaration
to recognize the shares of the original incorporators would entail unnecessary delay and
expense. Besides, the Court of Appeals added, the incorporators have already proved their
stockholdings through the provisions of the articles of incorporation.[10]
In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and
legal. They submit that reliance on the 1952 articles of incorporation for determining the
quorum negates the existence and validity of the stock and transfer book which private
respondents themselves prepared. In addition, they posit that private respondents cannot
avail of the benefits secured by the heirs of Acayan, as private respondents must show
and prove entitlement to the founders and common shares in a separate and independent
action/proceeding.
In private respondents Memorandum[11] dated 08 March 2000, they point out that the
instant petition raises the same facts and issues as those raised in G.R. No. 131315[12],
which was denied by the First Division of this Court on 18 January 1999 for failure to
show that the Court of Appeals committed any reversible error. They add that as a logical
consequence, the instant petition should be dismissed on the ground of res judicata.
Furthermore, private respondents claim that in view of the applicability of the rule on res
judicata, petitioners counsel should be cited for contempt for violating the rule against
forum-shopping.[13]
For their part, petitioners claim that the principle of res judicata does not apply to the
instant case. They argue that the instant petition is separate and distinct from G.R. No.
131315, there being no identity of parties, and more importantly, the parties in the two
petitions have their own distinct rights and interests in relation to the subject matter in
litigation. For the same reasons, they claim that counsel for petitioners cannot be found
guilty of forum-shopping.[14]
In their Manifestation and Motion[15] dated 22 September 2004, private respondents
moved for the dismissal of the instant petition in view of the dismissal of G.R. No.
131315. Attached to the said manifestation is a copy of the Entry of Judgment[16] issued
by the First Division dated 01 December 1999.

The petition must be denied, not on res judicata, but on the ground that like the petition in
G.R. No. 131315 it fails to impute reversible error to the challenged Court of Appeals
Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or
matter settled by judgment.[17] The doctrine of res judicata provides that a final
judgment, on the merits rendered by a court of competent jurisdiction is conclusive as to
the rights of the parties and their privies and constitutes an absolute bar to subsequent
actions involving the same claim, demand, or cause of action.[18] The elements of res
judicata are (a) identity of parties or at least such as representing the same interest in both
actions; (b) identity of rights asserted and relief prayed for, the relief being founded on
the same facts; and (c) the identity in the two (2) particulars is such that any judgment
which may be rendered in the other action will, regardless of which party is successful,
amount to res judicata in the action under consideration.[19]
There is no dispute as to the identity of subject matter since the crucial point in both cases
is the propriety of including the still unproven shares of respondents for purposes of
determining the quorum. Petitioners, however, deny that there is identity of parties and
causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain
whether the same facts or evidence would support and establish the former and present
causes of action.[20] More significantly, there is identity of causes of action when the
judgment sought will be inconsistent with the prior judgment.[21] In both petitions,
petitioners assert that the Court of Appeals Decision effectively negates the existence and
validity of the stock and transfer book, as well as automatically grants private
respondents shares of stocks which they do not own, or the ownership of which remains
to be unproved. Petitioners in the two petitions rely on the entries in the stock and transfer
book as the proper basis for computing the quorum, and consequently determine the
degree of control one has over the company. Essentially, the affirmance of the SEC Order
had the effect of diminishing their control and interests in the company, as it allowed the
participation of the individual private respondents in the election of officers of the
corporation.
Absolute identity of parties is not a condition sine qua non for res judicata to applya
shared identity of interest is sufficient to invoke the coverage of the principle.[22]
However, there is no identity of parties between the two cases. The parties in the two
petitions have their own rights and interests in relation to the subject matter in litigation.
As stated by petitioners in their Reply to Respondents Memorandum,[23] there are no
two separate actions filed, but rather, two separate petitions for review on certiorari filed
by two distinct parties with the Court and represented by their own counsels, arising from
an adverse consolidated decision promulgated by the Court of Appeals in one action or

proceeding.[24] As such, res judicata is not present in the instant case.

Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the
rules against forum-shopping. In the Verification/Certification[25] portion of the petition,
petitioners clearly stated that there was then a pending motion for reconsideration of the
18 August 1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R. SP
No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for
clarification. Moreover, the records indicate that petitioners filed their Manifestation[26]
dated 20 January 1998, informing the Court of their receipt of the petition in G.R. No.
131315 in compliance with their duty to inform the Court of the pendency of another
similar petition. The Court finds that petitioners substantially complied with the rules
against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and
arguments as those in G.R. No. 131315 which the First Division has long denied with
finality. The First Division found the petition before it inadequate in failing to raise any
reversible error on the part of the Court of Appeals. We reach a similar conclusion as
regards the present petition.
The crucial issue in this case is whether it is the companys stock and transfer book, or its
1952 Articles of Incorporation, which determines stockholders shareholdings, and
provides the basis for computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the charter of the
corporation and the contractual relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its stockholders.[27] When
PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as The
Corporation Law. Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of
the Philippines, may form a private corporation for any lawful purpose or purposes by
filing with the Securities and Exchange Commission articles of incorporation duly
executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the
Philippines, and the number of shares into which it is divided, and if such stock be in
whole or in part without par value then such fact shall be stated; Provided, however, That
as to stock without par value the articles of incorporation need only state the number of
shares into which said capital stock is divided.

(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par
stock actually subscribed, the amount or number of shares of no-par stock subscribed by
each and the sum paid by each on his subscription. . . .[28]
A review of PMMSIs articles of incorporation[29] shows that the corporation complied
with the requirements laid down by Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS
(P90,000.00) divided into two classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
....
8. That the amount of the entire capital stock which has been actually subscribed is
TWENTY ONE THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following
persons have subscribed for the number of shares and amount of capital stock set out after
their respective names:
SUBSCRIBER
SUBSCRIBED
AMOUNT SUBSCRIBED

No. of Shares
Par Value
Crispulo J. Onrubia
120 Founders
P 2,400.00
Juan H. Acayan
120 "
2, 400.00

Martin P. Sagarbarria
100 "
2, 000.00
Mauricio G. Gallaga
50 "
1, 000.00
Luis Renteria
50 "
1, 000.00
Faustina M. de Onrubia
140 "
2, 800.00
Mrs. Ramon Araneta
40 "
800.00
Carlos M. Onrubia
80 "
1,600.00

700
P 14,000.00

SUBSCRIBER

SUBSCRIBED
No. of Shares
AMOUNT SUBSCRIBED
Par Value

Crispulo J. Onrubia
12 Common
P 1,200.00
Juan H. Acayan
12 "
1,200.00
Martin P. Sagarbarria
8"
800.00
Mauricio G. Gallaga
8"
800.00
Luis Renteria
8"
800.00
Faustina M. de Onrubia
12 "
1,200.00

Mrs. Ramon Araneta

8"
800.00
Carlos M. Onrubia
8"
800.00

76
P 7,600.00[30]
There is no gainsaying that the contents of the articles of incorporation are binding, not
only on the corporation, but also on its shareholders. In the instant case, the articles of
incorporation indicate that at the time of incorporation, the incorporators were bona fide
stockholders of seven hundred (700) founders shares and seventy-six (76) common
shares. Hence, at that time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and
addresses of all stockholders arranged alphabetically, the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment thereof; a
statement of every alienation, sale or transfer of stock made, the date thereof and by and
to whom made; and such other entries as may be prescribed by law.[31] A stock and
transfer book is necessary as a measure of precaution, expediency and convenience since
it provides the only certain and accurate method of establishing the various corporate acts
and transactions and of showing the ownership of stock and like matters.[32] However, a
stock and transfer book, like other corporate books and records, is not in any sense a
public record, and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein.[33] In fact, it is generally held that the records
and minutes of a corporation are not conclusive even against the corporation but are
prima facie evidence only,[34] and may be impeached or even contradicted by other
competent evidence.[35] Thus, parol evidence may be admitted to supply omissions in
the records or explain ambiguities, or to contradict such records.[36]
In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the
Philippines supplanted Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there
must be present, either in person or by representative authorized to act by written proxy,
the owners of a majority of the outstanding capital stock, or if there be no capital stock, a

majority of the members entitled to vote. . . .

Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the bylaws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or majority of the members in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term outstanding capital stock as used in
this code, means the total shares of stock issued to subscribers or stockholders whether or
not fully or partially paid (as long as there is binding subscription agreement) except
treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and
issued, whether it be founders shares or common shares.[37] In the instant case, two
figures are being pitted against each other those contained in the articles of incorporation,
and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate
stock and transfer book, and completely disregarding the issued and outstanding shares as
indicated in the articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The stock and transfer
book of PMMSI cannot be used as the sole basis for determining the quorum as it does
not reflect the totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and outstanding as
compared to that listed in the stock and transfer book. As aptly stated by the SEC in its
Order dated 15 July 1996:[38]
It is to be explained, that if at the onset of incorporation a corporation has 771 shares
subscribed, the Stock and Transfer Book should likewise reflect 771 shares. Any sale,
disposition or even reacquisition of the company of its own shares, in which it becomes
treasury shares, would not affect the total number of shares in the Stock and Transfer
Book. All that will change are the entries as to the owners of the shares but not as to the
amount of shares already subscribed.
This is precisely the reason why the Stock and Transfer Book was not given probative
value. Did the shares, which were not recorded in the Stock and Transfer Book, but were
recorded in the Articles of Iincorporation just vanish into thin air? . . . .[39]
As shown above, at the time the corporation was set-up, there were already seven
hundred seventy-six (776) issued and outstanding shares as reflected in the articles of
incorporation. No proof was adduced as to any transaction effected on these shares from
the time PMMSI was incorporated up to the time the instant petition was filed, except for
the thirty-three (33) shares which were recorded in the stock and transfer book in 1978,
and the additional one hundred thirty-two (132) in 1982. But obviously, the shares so

ordered recorded in the stock and transfer book are among the shares reflected in the
articles of incorporation as the shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation
merely because the corporate officers failed to keep its records accurately.[40] A
corporations records are not the only evidence of the ownership of stock in a corporation.
[41] In an American case,[42] persons claiming shareholders status in a professional
corporation were listed as stockholders in the amendment to the articles of incorporation.
On that basis, they were in all respects treated as shareholders. In fact, the acts and
conduct of the parties may even constitute sufficient evidence of ones status as a
shareholder or member.[43] In the instant case, no less than the articles of incorporation
declare the incorporators to have in their name the founders and several common shares.
Thus, to disregard the contents of the articles of incorporation would be to pretend that
the basic document which legally triggered the creation of the corporation does not exist
and accordingly to allow great injustice to be caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals gravely erred in applying the Espejo decision
to the benefit of respondents. The Court believes that the more precise statement of the
issue is whether in its assailed Decision, the Court of Appeals can declare private
respondents as the heirs of the incorporators, and consequently register the founders
shares in their name. However, this issue as recast is not actually determinative of the
present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of
their shares in PMMSI as recorded in the stock and transfer book and instantly created
inexistent shares in favor of private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the
shares of the original incorporators would entail unnecessary delay and expense on the
part of the litigants, considering that the incorporators had already proved ownership of
such shares as shown in the articles of incorporation.[44] There was no declaration of
who the individual owners of these shares were on the date of the promulgation of the
Decision. As properly stated by the SEC in its Order dated 20 June 1996, to which the
appellate courts Decision should be related, if at all, the ownership of these shares should
only be subjected to the proper judicial (probate) or extrajudicial proceedings in order to
determine the respective shares of the legal heirs of the deceased incorporators.[45]
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs
against petitioners.
SO ORDERED.
SECOND DIVISION
[G.R. No. 122174. October 3, 2002]

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner,

vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due
course and dismissing the petition filed by Industrial Refractories Corp. of the Philippines
(IRCP).
Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly
organized on October 13, 1976 for the purpose of engaging in the business of
manufacturing, producing, selling, exporting and otherwise dealing in any and all
refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its
corporate and business name with the Bureau of Domestic Trade.
Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under
the name Synclaire Manufacturing Corporation. It amended its Articles of Incorporation
on August 23, 1985 to change its corporate name to Industrial Refractories Corp. of the
Philippines. It is engaged in the business of manufacturing all kinds of ceramics and other
products, except paints and zincs.
Both companies are the only local suppliers of monolithic gunning mix.[1]
Discovering that petitioner was using such corporate name, respondent RCP filed on
April 14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel
petitioner to change its corporate name on the ground that its corporate name is
confusingly similar with that of petitioners such that the public may be confused or
deceived into believing that they are one and the same corporation.[2]
The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993
with the following dispositive portion:
WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the
respondent declaring the latters corporate name Industrial Refractories Corporation of the
Philippines as deceptively and confusingly similar to that of petitioners corporate name
Refractories Corporation of the Philippines. Accordingly, respondent is hereby directed to
amend its Articles of Incorporation by deleting the name Refractories Corporation of the
Philippines in its corporate name within thirty (30) days from finality of this Decision.
Likewise, respondent is hereby ordered to pay the petitioner the sum of P50,000.00 as
attorneys fees.[3]
Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction
over the case, and that respondent RCP has no right to the exclusive use of its corporate
name as it is composed of generic or common words.[4]

In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in
that petitioner was ordered to delete or drop from its corporate name only the word
Refractories.[5]
Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review
on certiorari to the Court of Appeals which then rendered the herein assailed decision.
The appellate court upheld the jurisdiction of the SEC over the case and ruled that the
corporate names of petitioner IRCP and respondent RCP are confusingly or deceptively
similar, and that respondent RCP has established its prior right to use the word
Refractories as its corporate name.[6] The appellate court also found that the petition was
filed beyond the reglementary period.[7]
Hence, herein petition which we must deny.
Petitioner contends that the petition before the Court of Appeals was timely filed. It must
be noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the
governing rule on appeals from quasi-judicial agencies like the SEC was Supreme Court
Circular No. 1-91. As provided therein, the remedy should have been a petition for review
filed before the Court of Appeals within fifteen (15) days from notice, raising questions
of fact, of law, or mixed questions of fact and law.[8] A motion for reconsideration
suspends the running of the period.[9]
In the case at bench, there is a discrepancy between the dates provided by petitioner and
respondent. Petitioner alleges the following dates of receipt and filing:[10]
June 10, 1994 Receipt of SECs Decision dated May 10, 1994
June 20, 1994 Filing of Motion for Reconsideration
September 1, 1994 Receipt of SECs Order dated August 3, 1994 denying petitioners
motion for reconsideration
September 2, 1994 Filing of Motion for extension of time
September 6, 1994 Filing of Petition
Respondent RCP, however, asserts that the foregoing dates are incorrect as the
certifications issued by the SEC show that petitioner received the SECs Decision dated
May 10, 1994 on June 9, 1994, filed the motion for reconsideration via registered mail on
June 25, 1994, and received the Order dated August 3, 1994 on August 15, 1994.[11]
Thus, the petition was filed twenty-one (21) days beyond the reglementary period
provided in Supreme Court Circular No. 1-91.[12]
If reckoned from the dates supplied by petitioner, then the petition was timely filed. On
the other hand, if reckoned from the dates provided by respondent RCP, then it was filed
way beyond the reglementary period. On this score, we agree with the appellate courts
finding that petitioner failed to rebut respondent RCPs allegations of material dates of
receipt and filing.[13] In addition, the certifications were executed by the SEC officials
based on their official records[14] which enjoy the presumption of regularity.[15] As

such, these are prima facie evidence of the facts stated therein.[16] And based on such
dates, there is no question that the petition was filed with the Court of Appeals beyond the
fifteen (15) day period. On this ground alone, the instant petition should be denied as the
SEC En Bancs decision had already attained finality and the SECs findings of fact, when
supported by substantial evidence, is final.[17]
Nevertheless, to set the matters at rest, we shall delve into the other issues posed by
petitioner.
Petitioners arguments, substantially, are as follows: (1) jurisdiction is vested with the
regular courts as the present case is not one of the instances provided in P.D. 902-A; (2)
respondent RCP is not entitled to use the generic name refractories; (3) there is no
confusing similarity between their corporate names; and (4) there is no basis for the
award of attorneys fees.[18]
Petitioners argument on the SECs jurisdiction over the case is utterly myopic. The
jurisdiction of the SEC is not merely confined to the adjudicative functions provided in
Section 5 of P.D. 902-A, as amended.[19] By express mandate, it has absolute
jurisdiction, supervision and control over all corporations.[20] It also exercises regulatory
and administrative powers to implement and enforce the Corporation Code,[21] one of
which is Section 18, which provides:
SEC. 18. Corporate name. -- No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.
It is the SECs duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and it
has authority to de-register at all times and under all circumstances corporate names
which in its estimation are likely to generate confusion.[22] Clearly therefore, the present
case falls within the ambit of the SECs regulatory powers.[23]
Likewise untenable is petitioners argument that there is no confusing or deceptive
similarity between petitioner and respondent RCPs corporate names. Section 18 of the
Corporation Code expressly prohibits the use of a corporate name which is identical or
deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to existing
laws. The policy behind the foregoing prohibition is to avoid fraud upon the public that
will have occasion to deal with the entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of administration and supervision over
corporation.[24]
Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership

Names[25] specifically requires that: (1) a corporate name shall not be identical,
misleading or confusingly similar to one already registered by another corporation with
the Commission;[26] and (2) if the proposed name is similar to the name of a registered
firm, the proposed name must contain at least one distinctive word different from the
name of the company already registered.[27]
As held in Philips Export B.V. vs. Court of Appeals,[28] to fall within the prohibition of
the law, two requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the use of such corporate
name;
and
(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law.
As regards the first requisite, it has been held that the right to the exclusive use of a
corporate name with freedom from infringement by similarity is determined by priority of
adoption.[29] In this case, respondent RCP was incorporated on October 13, 1976 and
since then has been using the corporate name Refractories Corp. of the Philippines.
Meanwhile, petitioner was incorporated on August 23, 1979 originally under the name
Synclaire Manufacturing Corporation. It only started using the name Industrial
Refractories Corp. of the Philippines when it amended its Articles of Incorporation on
August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus,
being the prior registrant, respondent RCP has acquired the right to use the word
Refractories as part of its corporate name.
Anent the second requisite, in determining the existence of confusing similarity in
corporate names, the test is whether the similarity is such as to mislead a person using
ordinary care and discrimination and the Court must look to the record as well as the
names themselves.[30] Petitioners corporate name is Industrial Refractories Corp. of the
Phils., while respondents is Refractories Corp. of the Phils. Obviously, both names
contain the identical words Refractories, Corporation and Philippines. The only word that
distinguishes petitioner from respondent RCP is the word Industrial which merely
identifies a corporations general field of activities or operations. We need not linger on
these two corporate names to conclude that they are patently similar that even with
reasonable care and observation, confusion might arise.[31] It must be noted that both
cater to the same clientele, i.e. the steel industry. In fact, the SEC found that there were
instances when different steel companies were actually confused between the two,
especially since they also have similar product packaging.[32] Such findings are accorded
not only great respect but even finality, and are binding upon this Court, unless it is
shown that it had arbitrarily disregarded or misapprehended evidence before it to such an
extent as to compel a contrary conclusion had such evidence been properly appreciated.
[33] And even without such proof of actual confusion between the two corporate names,

it suffices that confusion is probable or likely to occur.[34]

Refractory materials are described as follows:
Refractories are structural materials used at high temperatures to [sic] industrial furnaces.
They are supplied mainly in the form of brick of standard sizes and of special shapes.
Refractories also include refractory cements, bonding mortars, plastic firebrick, castables,
ramming mixtures, and other bulk materials such as dead-burned grain magneside,
chrome or ground ganister and special clay.[35]
While the word refractories is a generic term, its usage is not widespread and is limited
merely to the industry/trade in which it is used, and its continuous use by respondent RCP
for a considerable period has made the term so closely identified with it. [36] Moreover,
as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa Bansang
Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng Katotohanan,
petitioners appropriation of respondent's corporate name cannot find justification under
the generic word rule. [37] A contrary ruling would encourage other corporations to adopt
verbatim and register an existing and protected corporate name, to the detriment of the
public.[38]
Finally, we find the award of P50,000.00 as attorney's fees to be fair and reasonable.
Article 2208 of the Civil Code allows the award of such fees when its claimant is
compelled to litigate with third persons or to incur expenses to protect its just and valid
claim. In this case, despite its undertaking to change its corporate name in case another
firm has acquired a prior right to use such name,[39] it refused to do so, thus compelling
respondent to undergo litigation and incur expenses to protect its corporate name.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of
merit.
Costs against petitioner.
SO ORDERED.
FIRST DIVISION
[G.R. No. 137592. December 12, 2001]
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA
BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS KAY CRISTO JESUS,
HALIGI AT SUHAY NG KATOTOHANAN, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7, 1997[1] and the
Resolution dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No.

40933, which affirmed the Decision of the Securities and Exchange and Commission
(SEC) in SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of
God in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-stock religious society or
corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other
members of respondent corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-stock religious society or
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name, which petition was docketed as SEC Case No. 1774. On May 4, 1988,
the SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another
name that is not similar or identical to any name already used by a corporation,
partnership or association registered with the Commission.[5] No appeal was taken from
said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng
Dios Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for
Haligi at Saligan ng Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as
SEC Case No. 03-94-4704, praying that petitioner be compelled to change its corporate
name and be barred from using the same or similar name on the ground that the same
causes confusion among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion
to dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in
default and respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner
(respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the Petitioner,
any corporation, association, and/or partnership presently registered with the
Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and

Legal Department [CLD] of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their end.
SO ORDERED.[7]
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No.
539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision,
upon a finding that petitioner's corporate name was identical or confusingly or
deceptively similar to that of respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the
Court of Appeals rendered the assailed decision affirming the decision of the SEC En
Banc. Petitioners motion for reconsideration was denied by the Court of Appeals on
February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT
PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED
ON TOTALLY INAPPLICABLE JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF
THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS
INSTITUTION.
III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND
PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN
THE APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE
INSTANT CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE
THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS
FREEDOM, THEREBY FAILING TO APPLY THE SAME TO PROTECT
PETITIONERS RIGHTS.[9]

Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the decision
of the Court of Appeals and the SEC should be set aside because the negligence of its
former counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its
motion to dismiss was denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds the
client. This is based on the rule that any act performed by a lawyer within the scope of his
general or implied authority is regarded as an act of his client.[11] An exception to the
foregoing is where the reckless or gross negligence of the counsel deprives the client of
due process of law.[12] Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause
consisted in filing a motion for extension of time to file answer before the trial court.
When his client was declared in default, the counsel did nothing and allowed the
judgment by default to become final and executory. Upon the insistence of his client, the
counsel filed a petition to annul the judgment with the Court of Appeals, which denied
the petition, and again the counsel allowed the denial to become final and executory. This
Court found the counsel grossly negligent and consequently declared as null and void the
decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before the
SEC a motion to dismiss on the ground of lack of cause of action. When his client was
declared in default for failure to file an answer, Atty. Garaygay moved for reconsideration
and lifting of the order of default.[13] After judgment by default was rendered against
petitioner corporation, Atty. Garaygay filed a motion for extension of time to
appeal/motion for reconsideration, and thereafter a motion to set aside the decision.[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file
an answer that led to the rendition of a judgment by default against petitioner, his efforts
were palpably real, albeit bereft of zeal.[15]
Likewise, the issue of prescription, which petitioner raised for the first time on appeal to
the Court of Appeals, is untenable. Its failure to raise prescription before the SEC can
only be construed as a waiver of that defense.[16] At any rate, the SEC has the authority
to de-register at all times and under all circumstances corporate names which in its
estimation are likely to spawn confusion. It is the duty of the SEC to prevent confusion in
the use of corporate names not only for the protection of the corporations involved but
more so for the protection of the public.[17]
Section 18 of the Corporation Code provides:
Corporate Name. --- No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or is contrary to existing laws. When a change in the

corporate name is approved, the Commission shall issue an amended certificate of

incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit
for injunction against the new corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not only
two but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc., which, petitioner argues, effectively distinguished it from respondent
corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners name
are, as correctly observed by the SEC, merely descriptive of and also referring to the
members, or kaanib, of respondent who are likewise residing in the Philippines. These
words can hardly serve as an effective differentiating medium necessary to avoid
confusion or difficulty in distinguishing petitioner from respondent. This is especially so,
since both petitioner and respondent corporations are using the same acronym --- H.S.K.;
[19] not to mention the fact that both are espousing religious beliefs and operating in the
same place. Parenthetically, it is well to mention that the acronym H.S.K. used by
petitioner stands for Haligi at Saligan ng Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to the public,
petitioner highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN, which is strikingly similar to
respondent's corporate name, thus making it even more evident that the additional words
Ang Mga Kaanib and Sa Bansang Pilipinas, Inc., are merely descriptive of and pertaining
to the members of respondent corporation.[21]
Significantly, the only difference between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY. These words are synonymous --- both
mean ground, foundation or support. Hence, this case is on all fours with Universal Mills
Corporation v. Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate
names Universal Mills Corporation and Universal Textile Mills, Inc., are undisputably so
similar that even under the test of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name
cannot find justification under the generic word rule. We agree with the Court of Appeals

conclusion that a contrary ruling would encourage other corporations to adopt verbatim
and register an existing and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names
Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head,
Church of God in Christ & By the Holy Spirit, and other similar names, is of no
consequence. It does not authorize the use by petitioner of the essential and
distinguishing feature of respondent's registered and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right to
religious freedom. In so doing, the SEC merely compelled petitioner to abide by one of
the SEC guidelines in the approval of partnership and corporate names, namely its
undertaking to manifest its willingness to change its corporate name in the event another
person, firm, or entity has acquired a prior right to the use of the said firm name or one
deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED.
The appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

G.R. No. L-28351

July 28, 1977

UNIVERSAL MILLS CORPORATION, petitioner,

vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.
Emigdio G. Tanjuatco for petitioner.
Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.

BARREDO, J.:
Appeal from the order of the Securities and Exchange Commission in S.E.C. Case No.
1079, entitled In the Matter of the Universal Textile Mills, Inc. vs. Universal Mills
Corporation, a petition to have appellant change its corporate name on the ground that
such name is "confusingly and deceptively similar" to that of appellee, which petition the
Commission granted.
According to the order, "the Universal Textile Mills, Inc. was organ on December 29,
1953, as a textile manufacturing firm for which it was issued a certificate of registration

on January 8, 1954. The Universal Mills Corporation, on the other hand, was registered in
this Commission on October 27, 1954, under its original name, Universal Hosiery Mills
Corporation, having as its primary purpose the "manufacture and production of hosieries
and wearing apparel of all kinds." On May 24, 1963, it filed an amendment to its articles
of incorporation changing its name to Universal Mills Corporation, its present name, for
which this Commission issued the certificate of approval on June 10, 1963.
The immediate cause of this present complaint, however, was the occurrence of a fire
which gutted respondent's spinning mills in Pasig, Rizal. Petitioner alleged that as a result
of this fire and because of the similarity of respondent's name to that of herein
complainant, the news items appearing in the various metropolitan newspapers carrying
reports on the fire created uncertainty and confusion among its bankers, friends,
stockholders and customers prompting petitioner to make announcements, clarifying the
real Identity of the corporation whose property was burned. Petitioner presented
documentary and testimonial evidence in support of this allegation.
On the other hand, respondent's position is that the names of the two corporations are not
similar and even if there be some similarity, it is not confusing or deceptive; that the only
reason that respondent changed its name was because it expanded its business to include
the manufacture of fabrics of all kinds; and that the word 'textile' in petitioner's name is
dominant and prominent enough to distinguish the two. It further argues that petitioner
failed to present evidence of confusion or deception in the ordinary course of business;
that the only supposed confusion proved by complainant arose out of an extraordinary
occurrence a disastrous fire. (pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the jurisprudence on the matter, it appears necessary under the
circumstances to enjoin the respondent Universal Mills Corporation from further using its
present corporate name. Judging from what has already happened, confusion is not only
apparent, but possible. It does not matter that the instance of confusion between the two
corporate names was occasioned only by a fire or an extraordinary occurrence. It is
precisely the duty of this Commission to prevent such confusion at all times and under all
circumstances not only for the purpose of protecting the corporations involved but more
so for the protection of the public.
In today's modern business life where people go by tradenames and corporate images, the
corporate name becomes the more important. This Commission cannot close its eyes to
the fact that usually it is the sound of all the other words composing the names of
business corporations that sticks to the mind of those who deal with them. The word
"textile" in Universal Textile Mills, Inc.' can not possibly assure the exclusion of all other
entities with similar names from the mind of the public especially so, if the business they
are engaged in are the same, like in the instant case.
This Commission further takes cognizance of the fact that when respondent filed the
amendment changing its name to Universal Mills Corporation, it correspondingly filed a

written undertaking dated June 5, 1963 and signed by its President, Mr. Mariano Cokiat,
promising to change its name in the event that there is another person, firm or entity who
has obtained a prior right to the use of such name or one similar to it. That promise is still
binding upon the corporation and its responsible officers. (pp. 17-18, Record.)
It is obvious that the matter at issue is within the competence of the Securities and
Exchange Commission to resolve in the first instance in the exercise of the jurisdiction it
used to possess under Commonwealth Act 287 as amended by Republic Act 1055 to
administer the application and enforcement of all laws affecting domestic corporations
and associations, reserving to the courts only conflicts of judicial nature, and, of course,
the Supreme Court's authority to review the Commissions actuations in appropriate
instances involving possible denial of due process and grave abuse of discretion. Thus, in
the case at bar, there being no claim of denial of any constitutional right, all that We are
called upon to determine is whether or not the order of the Commission enjoining
petitioner to its corporate name constitutes, in the light of the circumstances found by the
Commission, a grave abuse of discretion.
We believe it is not. Indeed, it cannot be said that the impugned order is arbitrary and
capricious. Clearly, it has rational basis. The corporate names in question are not
Identical, but they are indisputably so similar that even under the test of "reasonable care
and observation as the public generally are capable of using and may be expected to
exercise" invoked by appellant, We are apprehensive confusion will usually arise,
considering that under the second amendment of its articles of incorporation on August
14, 1964, appellant included among its primary purposes the "manufacturing, dyeing,
finishing and selling of fabrics of all kinds" in which respondent had been engaged for
more than a decade ahead of petitioner. Factually, the Commission found existence of
such confusion, and there is evidence to support its conclusion. Since respondent is not
claiming damages in this proceeding, it is, of course, immaterial whether or not appellant
has acted in good faith, but We cannot perceive why of all names, it had to choose a name
already being used by another firm engaged in practically the same business for more
than a decade enjoying well earned patronage and goodwill, when there are so many
other appropriate names it could possibly adopt without arousing any suspicion as to its
motive and, more importantly, any degree of confusion in the mind of the public which
could mislead even its own customers, existing or prospective. Premises considered, there
is no warrant for our interference.
As this is purely a case of injunction, and considering the time that has elapsed since the
facts complained of took place, this decision should not be deemed as foreclosing any
further remedy which appellee may have for the protection of its interests.
WHEREFORE, with the reservation already mentioned, the appealed decision is
affirmed. Costs against petitioners.
Fernando (Chairman), Antonio, Aquino, Concepcion Jr. and Santos, JJ., concur.

G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS,
LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN,
INC., LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM,
CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN
PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN
PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for
respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED
NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY
EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION
EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO
THE WORD "LYCEUM". The Articles of Incorporation of a corporation must, among
other things, set out the name of the corporation. Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are concerned: "Section 18.
Corporate name. No corporate name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name." The policy underlying the prohibition in Section
18 against the registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation or which is "patently deceptive"
or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the
public which would have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and supervision
over corporations. We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate names of private respondent entities all
carry the word "Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the

Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum
of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM,"
NOT ATTENDED WITH EXCLUSIVITY. It is claimed, however, by petitioner that
the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the
result that word, although originally a generic, has become appropriable by petitioner to
the exclusion of other institutions like private respondents herein. The doctrine of
secondary meaning originated in the field of trademark law. Its application has, however,
been extended to corporate names sine the right to use a corporate name to the exclusion
of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the
doctrine of secondary meaning was elaborated in the following terms: " . . . a word or
phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase has come to mean
that the article was his product." The question which arises, therefore, is whether or not
the use by petitioner of "Lyceum" in its corporate name has been for such length of time
and with such exclusivity as to have become associated or identified with the petitioner
institution in the mind of the general public (or at least that portion of the general public
which has to do with schools). The Court of Appeals recognized this issue and answered
it in the negative: "Under the doctrine of secondary meaning, a word or phrase originally
incapable of exclusive appropriation with reference to an article in the market, because
geographical or otherwise descriptive might nevertheless have been used so long and so
exclusively by one producer with reference to this article that, in that trade and to that
group of the purchasing public, the word or phrase has come to mean that the article was
his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has evolved through the
substantial and exclusive use of the same for a considerable period of time. . . . No
evidence was ever presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the
appellant. If there was any of this kind, the same tend to prove only that the appellant had
been using the disputed word for a long period of time. . . . In other words, while the
appellant may have proved that it had been using the word 'Lyceum' for a long period of
time, this fact alone did not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had been using the same
word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other
educational institutions. Consequently, the allegations of the appellant in its first two
assigned errors must necessarily fail." We agree with the Court of Appeals. The number
alone of the private respondents in the case at bar suggests strongly that petitioner's use of
the word "Lyceum" has not been attended with the exclusivity essential for applicability
of the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later
with other private respondent institutions which registered with the SEC using "Lyceum"

as part of their corporation names. There may well be other schools using Lyceum or
Liceo in their names, but not registered with the SEC because they have not adopted the
corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE
WHETHER THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO
ANOTHER CORPORATE ENTITY'S NAME. petitioner institution is not entitled to a
legally enforceable exclusive right to use the word "Lyceum" in its corporate name and
that other institutions may use "Lyceum" as part of their corporate names. To determine
whether a given corporate name is "identical" or "confusingly or deceptively similar"
with another entity's corporate name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety
and when the name of petitioner is juxtaposed with the names of private respondents,
they are not reasonably regarded as "identical" or "confusingly or deceptively similar"
with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it
used the corporate name Lyceum of the Philippines, Inc. and has used that name ever
since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the
private respondents, which are also educational institutions, to delete the word "Lyceum"
from their corporate names and permanently to enjoin them from using "Lyceum" as part
of their respective names.
Some of the private respondents actively participated in the proceedings before the SEC.
These are the following, the dates of their original SEC registration being set out below
opposite their respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972

The following private respondents were declared in default for failure to file an answer
despite service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
1.

The Lyceum of Malacanay;

2.

The Lyceum of Marbel; and

3.

The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and
the Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case
against the Liceum of Araullo was dismissed when that school motu proprio change its
corporate name to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of
Baguio, Inc. to require it to change its corporate name and to adopt another name not
"similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977,
Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of
the Lyceum of Baguio, Inc. were substantially identical because of the presence of a
"dominant" word, i.e., "Lyceum," the name of the geographical location of the campus
being the only word which distinguished one from the other corporate name. The SEC
also noted that petitioner had registered as a corporation ahead of the Lyceum of Baguio,
Inc. in point of time, 1 and ordered the latter to change its name to another name "not
similar or identical [with]" the names of previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a
case docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977,
the Court denied the Petition for Review for lack of merit. Entry of judgment in that case
was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all
the educational institutions it could find using the word "Lyceum" as part of their
corporate name, and advised them to discontinue such use of "Lyceum." When, with the
passage of time, it became clear that this recourse had failed, petitioner instituted before
the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary right to

the word "Lyceum." The SEC hearing officer rendered a decision sustaining petitioner's
claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the
SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the
word "Lyceum" was capable of appropriation and that petitioner had acquired an
enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the
hearing officer was reversed and set aside. The SEC En Banc did not consider the word
"Lyceum" to have become so identified with petitioner as to render use thereof by other
institutions as productive of confusion about the identity of the schools concerned in the
mind of the general public. Unlike its hearing officer, the SEC En Banc held that the
attaching of geographical names to the word "Lyceum" served sufficiently to distinguish
the schools from one another, especially in view of the fact that the campuses of
petitioner and those of the private respondents were physically quite remote from each
other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June
1991, however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc.
4 Petitioner filed a motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following
errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in
G.R. No. L-46595 did not constitute stare decisis as to apply to this case and in not
holding that said Resolution bound subsequent determinations on the right to exclusive
use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum,
Inc. was incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a
secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be
appropriated by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We
begin by noting that the Resolution of the Court in G.R. No. L-46595 does not, of course,
constitute res adjudicata in respect of the case at bar, since there is no identity of parties.
Neither is stare decisis pertinent, if only because the SEC En Banc itself has re-examined
Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute
Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the Sulit
ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name

of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule

insofar as corporate names are concerned:
"SECTION 18. Corporate name. No corporate name may be allowed by the
Securities an Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate
name which is "identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the public which would have occasion to
deal with the entity concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent institutions are
"identical with, or deceptively or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of
Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that
the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure
dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus,
Pericles and Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became
associated with schools and other institutions providing public lectures and concerts and
public discussions. Thus today, the word "Lyceum" generally refers to a school or an
institution of learning. While the Latin word "lyceum" has been incorporated into the
English language, the word is also found in Spanish (liceo) and in French (lycee). As the
Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term;
e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate,"
"Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university."
In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in
other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary
school or a college. It may be (though this is a question of fact which we need not
resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number of educational institutions
have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or
"Liceo" denotes a school or institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that that word, although originally a
generic, has become appropriable by petitioner to the exclusion of other institutions like
private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its
application has, however, been extended to corporate names sine the right to use a
corporate name to the exclusion of others is based upon the same principle which
underlies the right to use a particular trademark or tradename. 10 In Philippine Nut
Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was
elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to
an article on the market, because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one producer with reference to
his article that, in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum"
in its corporate name has been for such length of time and with such exclusivity as to
have become associated or identified with the petitioner institution in the mind of the
general public (or at least that portion of the general public which has to do with schools).
The Court of Appeals recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of
exclusive appropriation with reference to an article in the market, because geographical
or otherwise descriptive might nevertheless have been used so long and so exclusively by
one producer with reference to this article that, in that trade and to that group of the
purchasing public, the word or phrase has come to mean that the article was his produce
(Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. Consequently, the same
doctrine or principle cannot be made to apply where the evidence did not prove that the
business (of the plaintiff) has continued for so long a time that it has become of
consequence and acquired a good will of considerable value such that its articles and
produce have acquired a well-known reputation, and confusion will result by the use of
the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store,
Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the
aforementioned requisites. No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there was any of this kind, the same tend
to prove only that the appellant had been using the disputed word for a long period of
time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never
established or proven as in fact the evidence tend to convey that the cross-claimant was

already using the word 'Lyceum' seventeen (17) years prior to the date the appellant
started using the same word in its corporate name. Furthermore, educational institutions
of the Roman Catholic Church had been using the same or similar word like 'Liceo de
Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay'
long before appellant started using the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with its educational institution that
confusion will surely arise in the minds of the public if the same word were to be used by
other educational institutions.
In other words, while the appellant may have proved that it had been using the word
'Lyceum' for a long period of time, this fact alone did not amount to mean that the said
word had acquired secondary meaning in its favor because the appellant failed to prove
that it had been using the same word all by itself to the exclusion of others. More so,
there was no evidence presented to prove that confusion will surely arise if the same word
were to be used by other educational institutions. Consequently, the allegations of the
appellant in its first two assigned errors must necessarily fail." 13 (Underscoring partly in
the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private respondents in the
case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been
attended with the exclusivity essential for applicability of the doctrine of secondary
meaning. It may be noted also that at least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before
the petitioner registered its own corporate name with the SEC and began using the word
"Lyceum." It follows that if any institution had acquired an exclusive right to the word
"Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather
than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc.
failed to reconstruct its records before the SEC in accordance with the provisions of R.A.
No. 62, which records had been destroyed during World War II, Western Pangasinan
Lyceum should be deemed to have lost all rights it may have acquired by virtue of its past
registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered with
the SEC soon after petitioner had filed its own registration on 21 September 1950.
Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights
under its original 1933 registration, appears to us to be quite secondary in importance; we
refer to this earlier registration simply to underscore the fact that petitioner's use of the
word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive
use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth
shared with the Western Pangasinan Lyceum and a little later with other private
respondent institutions which registered with the SEC using "Lyceum" as part of their
corporation names. There may well be other schools using Lyceum or Liceo in their
names, but not registered with the SEC because they have not adopted the corporate form
of organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable

exclusive right to use the word "Lyceum" in its corporate name and that other institutions
may use "Lyceum" as part of their corporate names. To determine whether a given
corporate name is "identical" or "confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both
names. One must evaluate corporate names in their entirety and when the name of
petitioner is juxtaposed with the names of private respondents, they are not reasonably
regarded as "identical" or "confusingly or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the
public respondent Court of Appeals, the Petition for Review is DENIED for lack of merit,
and the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

THIRD DIVISION
[G.R. No. 139371. April 4, 2001]
INDIANA AEROSPACE UNIVERSITY, petitioner, vs. COMMISSION ON HIGHER
EDUCATION (CHED), respondent.
DECISION
PANGANIBAN, J.:
When the delayed filing of an answer causes no prejudice to the plaintiff, default orders
should be avoided. Inasmuch as herein respondent was improvidently declared in default,
its Petition for Certiorari to annul its default may be given due course. The act of the
Commission on Higher Education enjoining petitioner from using the word university in
it corporate name and ordering it to revert to its authorized name does not violate its
proprietary rights or constitute irreparable damage to the school. Indeed, petitioner has no
vested right to misrepresent itself to the public. An injunction is a remedy in equity and
should not be used to perpetuate a falsehood.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
challenging the July 21, 1999 Decision[1] of the Court of Appeals (CA) in CA-GR SP
No. 51346. The appellate court directed the Regional Trial Court (RTC) of Makati City,
Branch 136, to cease and desist from proceeding with Civil Case No. 98-811 and to
dismiss the Complaint for Damages filed by the Indiana Aerospace University against the
Commission on Higher Education (CHED). The dispositive portion of the CA Decision
reads as follows:
WHEREFORE, in the light of the foregoing consideration, and pursuant to pertinent

existing laws and jurisprudence on the matter, [the trial court] is hereby DIRECTED to
cease and desist from proceeding with Civil case No. 98-811 and to order the dismissal of
[petitioners] Petition dated March 31, 1999 in Civil Case No. 98-911 for lack of merit and
valid cause of action.[2]
The Facts
The facts of this case we are summarized by the CA, as follows:
Sometime in October 1996, Dr. Reynaldo B. Vera, Chairman, Technical Panel for
Engineering, Architecture, and Maritime Education (TPRAM) of [CHED], received a
letter dated October 18, 1998 (Annex C) from Douglas R. Macias, Chairman, Board of
Aeronautical Engineering, Professional Regulat[ory] Commission (PRC) and Chairman,
Technical Committee for Aeronautical Engineering (TPRAME) inquiring whether
[petitioner] had already acquired [u]niversity status in view of the latters advertisement in
[the] Manila Bulletin.
In a letter dated October 24, 1996, Dr. Vera formally referred the aforesaid letter to
Chairman Alcala with a request that the concerned Regional Office of [CHED] be
directed to conduct appropriate investigation on the alleged misrepresentation by
[petitioner]. Thereafter, [CHED] referred the matter to its Regional Director in Cebu City,
requesting said office to conduct an investigation and submit its report. The [R]eport
submitted in January 1997, stated in substance:
xxx xxx xxx
To recall it was in the month of May 1996, [that] Director Ma. Lilia Gaduyon met the
school [p]resident in the regional office and verbally talked[with] and advised them not to
use University when it first came out in an advertisement column of a local daily
newspaper in Cebu City. It was explained that there was a violation [committed by] his
institution [when it used] the term university unless the school ha[d] complied [with] the
basic requirement of being a university as prescribed in CHED Memorandum Order No.
48, s. 1996.
x x x x x x x x x.
As a consequence of said Report, [respondents] Legal Affairs Service was requested to
take legal action against [petitioner]. Subsequently, on February 3, 1997, [respondent]
directed [petitioner] to desist from using the term University, including the use of the
same in any of its alleged branches. In the course of it investigation, [respondent] was
able to verify from the Securities and Exchange Commission (SEC) that [petitioner had]
filed a proposal to amend its corporate name from Indiana School of Aeronautics to
Indiana Aerospace University, which was supposedly favorably recommended by the
Department of Education, Culture and Sports (DECS) per its Indorsement dated 17 July
1995, and on [that] basis, SEC issued to [petitioner] Certificate of Registration No. AS083-002689 dated August 7, 1995. Surprisingly, however, it ought to be noted, that SEC

Chairman Perfecto R. Yasay, Jr. wrote the following letter to the [c]hairman of
[respondent]:
Hon. Angel C. Alcala
Chairman
Commission on Higher Education
DAP Bldg., San Miguel Avenue
Ortigas Center, Pasig City
Dear Chairman Alcala:
This refers to your letter dated September 18, 1997 requesting this Commission to make
appropriate changes in the Articles of Incorporation of Indiana School of aeronautics, Inc.
due to its unauthorized use of the term University in its corporate name.
Relative thereto, please be informed that our records show that the above-mentioned
corporation has not filed any amended articles of incorporation that changed its corporate
name to include the term University.
In the case the corporation submit[s] an application for change of name, your Cease and
Desist Order shall be considered accordingly.
Very truly yours,
(SGD.) PERFECTO R. YASAY, JR.
Chairman
In reaction to [respondents] order for [petitioner] to desist from using the word
University, Jovenal Toring, [c]hairman and [f]ounder of [petitioner] wrote a letter dated
February 24, 1997 (Annex G) appealing for reconsideration of [respondents] Order, with
a promise to follow the provisions of CMO No. 48, pertinent portions of which have been
quoted in the Petition, to wit:
On 07 August 1995, in line with the call of the government to go for global
competitiveness and our vision to help in the development of aerospace technology, the
Board of Directors applied with the SEC for the amendment of Article I of the Articles of
Incorporation to read as Indiana Aerospace University instead of Indiana School of
Aeronautics, Inc.
xxxxxxxxx
In view thereof, we would like to appeal to you Fr. Delagoza to please reconsider your
order of February 3, 1997, otherwise the school will encounter financial difficulties and
suffer damages which will eventually result in the mass dislocation of xxx thousand[s] of
students. The undersigned, being the [c]hairman and [f]ounder, will try our very best to
follow the provisions of CHED MEMO No. 48, series of 1996 that took effect last June

18, 1996.
xxxxxxxxx
Thank you very much for giving me a copy of said CHED MEMO order No. 48. More
power and God Bless You.
x x x x x x x x x.
The appeal of [petitioner] was however rejected by [respondent] in its decision dated July
30, 1998 and the [the latter] ordered the former to cease and desist from using the word
University. However, prior to said date, on April 2, 1998, [petitioner] filed a Complaint
for Damages with prayer for Writ of preliminary and Mandatory Injunction and
Temporary Restraining Order against [respondent], docketed as Civil Case No. 98-811
before public respondent judge.
On April 7, 1998, [respondent] filed a Special Appearance with Motion to Dismiss, based
on 1) improper venue; 2) lack of authority of the person instituting the action; and 3) lack
of cause of action. On April 17, 1998, [petitioner] filed its Opposition to the Motion to
Dismiss [on] grounds stated therein, to which [respondent] filed a Reply on April 21,
1998, reiterating the same arguments in its Motion to Dismiss. After due hearing,
[petitioner] formally offered its evidence on July 23, 1998 while [respondent] made a
formal offer of evidence on July 28, 1998 to which [petitioner] filed its
Comments/Objections and finally, [respondent] submitted its Memorandum relative
thereto on October 1, 1998.
Public respondent judge, in an Order dated August 14, 1998, denied [respondents] Motion
to Dismiss and at the same time, issued a Writ of preliminary Injunction in favor of
[petitioner]. [Respondent], in the same Order, was directed to file its Answer within
fifteen (15)days from receipt of said Order, which was August 15, 1998.
xxxxxxxxx
WHEREFORE, and in consideration of all the foregoing [respondents] Motion to
Dismiss is hereby denied, and the [respondent] is directed to file its [A]nswer to the
[C]omplaint within fifteen (15) days from receipt of this Order.
In the meantime, [respondent], its officials, employees and all parties acting under its
authority are hereby enjoined to observe the following during the pendency of this case.
1. Not to publish or circulate any announcement in the newspaper, radio or television
regarding its Cease and Desist Order against xxx [petitioner];
2. Not to enforce the Cease and Desist Order issued against xxx [petitioner];
3. To maintain the status quo by not withholding the issuance of yearly school permits

and special order to all graduates.

Let a writ of preliminary Injunction to that effect issue upon posting by [petitioner] of an
injunction bond in the amount of One Hundred Thousand Pesos (P100,000.00), and
subject to the approval of the Court.
SO ORDERED.
On September 22, 1998, [petitioner] filed before public respondent a Motion To Declare
[Respondent] in [D]efault pursuant to Section 3, Rule 9 in relation to Section 4, Rule 16
of the Rules of Court, as amended, and at the same time praying [for] the Motion to [S]et
for [H]earing on October 30, 1998 at 8:30 a.m. On the same date, [respondent] filed a
Motion For Extension of Time to File its Answer, x x x until November 18, 1998. On
November 17, 1998, [respondent] filed its [A]nswer.
[Petitioner], on November 11, 1998 filed its Opposition to the Motion for Extension of
Time to File [Respondents] Answer and on November 9, 1998, a Motion to Expunge
[Respondents] answer and at the same time praying that its [M]otion be heard on
November 27, 1998 at 9:00 a.m. On even date, public respondent judge issued an Order
directing the Office of the Solicitor General to file within a period of ten (10) days from
date its written Opposition to the Motion to Expunge [Respondents] answer and within
the same period to file a written [N]otice of [A]ppearance in the case. Unable to file their
written Opposition to the Motion to Expunge within the period given by public
respondent, the OSG filed a Motion to Admit Written Opposition stating the reasons for
the same, attaching thereto the Opposition with [F]ormal [E]ntry of [A]ppearance.
In an Order dated December 9, 1998, (Annex A), public respondent judge ruled on
[Petitioners ] Motion to Declare [Respondent in Default], to wit:
WHEREFORE, and in view of all the foregoing, the present motion is granted.
[Petitioner] is hereby directed to present its evidence ex-parte before the [b]ranch [c]lerk
of [c]ourt, who is designated as [c]ommissioner for the purpose, within ten (10) days
from receipt of this [O]rder, and for the latter to submit his report within twenty (20) days
from the date the case is submitted for decision.
SO ORDERED.[3]
On February 23, 1999, respondent filed with the CA a Petition for certiorari, arguing that
the RTC had committed grave abuse of discretion (a) in denying the formers Motion to
Dismiss, (b) in issuing a Writ of Preliminary Injunction, and (c) in declaring respondent
in default despite its filing an Answer.
Ruling of the Court of Appeals
The CA ruled that petitioner had no cause of action against respondent. Petitioner failed
to show any evidence that it had been granted university status by respondent as required

under existing law and CHED rules and regulations. A certificate of incorporation under
an Unauthorized name does not confer upon petitioner the right to use the word
university in its name. The evidence submitted by respondent showed that the Securities
and Exchange Commission (SEC) had denied that petitioner had ever amended its
Articles of Incorporation to include university in its corporate name. For its part, the
Department of Education, Culture and Sports (DECS) denied having issued the alleged
Certification dated May 18, 1998, indorsing the change in petitioners corporate name.
Besides, neither the Corporation Code nor the SEC Charter vests the latter with the
authority to confer university status on a corporation that it regulates.
For the same reason, the appellate court also ruled that the Writ of Preliminary Injunction
had improvidently been issued. The doubtful right claimed by petitioner is subordinate to
the public interest to protect unsuspecting students and their parents from the
unauthorized operation and misrepresentation of an educational institution.
Respondent should not have been declared in default, because its answer had been filed
long before the RTC ruled upon petitioners Motion to declare respondent in default. Thus,
respondent had not obstinately refused to file an Answer; on the contrary, its failure to do
so on time was due to excusable negligence. Declaring it in default did not serve the ends
of justice, but only prevented it from pursuing the merits of its case.
Hence, this Petition.[4]
Issues
Petitioner alleges that the appellate court committed the following reversible errors:
A. In giving due course to respondent CHEDs Petition for Certiorari filed way beyond the
60-day reglementary period prescribed by Section 4, Rule 65 of the Rules of Court;
B. In not requiring Respondent CHED to first file a motion to Set Aside the Order of
Default dated December 9, 1998; and
C. In ordering the dismissal of Civil Case No. 98-811.[5]
In its Memorandum, petitioner adds that the CA erred in dissolving the Writ of
Preliminary Injunction issued by the RTC. We shall take up these issues in the following
order: (1) timeliness of the certiorari petition, (2) validity of the default order, (3) validity
of the preliminary injunction, and (4) dismissal of the Complaint.
This Courts Ruling
The Petition is partly meritorious.
First Issue: Timeliness of Certiorari

Petitioner claims that the Petition for certiorari of respondent should have been dismissed
by the CA, because it was filed out of time and was not preceded by a motion for
reconsideration in the RTC. The copy of the Order of August 14, 1998 had been served at
respondents office on August 15, 1998, but its Answer was filed only after 180 days
which, according to petitioner, could not be considered a reasonable period. On the other
hand, the Office of the Solicitor General (OSG) argues that the Order is null and void
and, hence, may be assailed at any time.
We hold that respondents Petition for Certiorari was seasonably filed. In computing its
timeliness, what should have been considered was not the Order of August 14, 1998, but
the date when respondent received the December 9, 1998 Order declaring it in default.
Since it received this Order only on January 13, 1999, and filed its Petition for Certiorari
on February 23, 1999, it obviously complied with the sixty-day reglementary period
stated in Section 4, Rule 65 of the 1997 Rules of Court. Moreover, the August 14, 1998
Order was not a proper subject of certiorari or appeal, since it was merely an
interlocutory order.
Exhaustion of Available Remedies
Petitioner also contends that certiorari cannot prosper in this case, because respondent did
not file a motion for reconsideration before filing its Petition for Certiorari with the CA.
Respondent counters that reconsideration should be dispensed with, because the
December 9, 1998 Order is a patent nullity.
The general rule is that, in order to give the lower court the opportunity to correct itself, a
motion for reconsideration is a prerequisite to certiorari. It also basic that petitioner must
exhaust all other available remedies before resorting to certiorari. This rule, however, is
subject to certain exceptions such as any of the following: (1) the issues raised are purely
legal in nature, (2) public interest is involved, (3) extreme urgency is obvious or (4)
special circumstances warrant immediate or more direct action.[6] It is patently clear that
the regulation or administration of educational institutions, especially on the tertiary
level, is invested with public interest. Hence, the haste with which the solicitor general
raised these issues before the appellate court is understandable. For the reason mentioned,
we rule that respondents Petition for Certiorari did not require prior resort to a motion for
reconsideration.
Second Issue: Validity of the Default Order
Petitioner avers the RTC was justified in declaring respondent in default, because the
August 14, 1998 Order directing the filing of an answer had been served on August 25,
1998. And as late as October 30, 1998, respondent could only file a Motion for Extension
of Time, which the trial court denied because of the expiry of the fifteen-day period.
Petitioner adds that respondents proper remedy would have been a Motion to Set Aside
the Order of Default, pursuant to Section 3(b), Rule 9 of the Rules of Court.
Respondent, in turn, avers that certiorari was the only plain, speedy and adequate remedy

in the ordinary course of law, because the default Order had improvidently been issued.
We agree with respondent. Lina v. Court of Appeals[7] discussed the remedies available
to a defendant declared in default, as follows: (1) a motion to set aside the order of
default under Section 3(b), Rule 9 of the Rules of Court, if the default was discovered
before judgment could be rendered; (2) a motion for new trial under Section 1(a) of Rule
37, if the default was discovered after judgment but while appeal is still available; (3) a
petition for relief under Rule 38, if judgment has become final and executory; and (4) an
appeal from the judgment under Section 1, Rule 41, even if no petition to set aside the
order of default has been resorted to.
These remedies, however, are available only to a defendant who has been validly declared
in default. Such defendant irreparably loses the right to participate in the trial. On the
other hand, a defendant improvidently declared in default may retain and exercise such
right after the order of default and the subsequent judgment by default are annulled, and
the case remanded to the court of origin. The former is limited to the remedy set forth in
section 2, paragraph 3 of Rule 41 of the pre 1997 Rules of Court, and can therefore
contest only the judgment by default on the designated ground that it is contrary to
evidence or law. The latter, however, has the following options: to resort to this same
remedy; to interpose a petition for certiorari seeking the nullification of the order of
default, even before the promulgation of a judgment by default; or in the event that
judgment has been rendered, to have such order and judgment declared void.
In prohibiting appeals from interlocutory orders, the law does not intend to accord
executory force to such writs, particularly when the effect would be to cause irreparable
damage. If in the course of trial, a judge proceeds without or in excess of jurisdiction, this
rule prohibiting an appeal does not leave the aggrieved party without any remedy.[8] In a
case like this, a special civil action of certiorari is the plain, speedy and adequate remedy.
Herein respondent controverts the judgment by default, not on the ground that it is
unsubstantiated by evidence or that it is contrary to law, but on the ground that it is
intrinsically void for having been rendered pursuant to a patently invalid order of default.
[9]
Grave Abuse of Discretion
Petitioner claims that in issuing the default Order, the RTC did not act with grave abuse
of discretion, because respondent had failed to file its answer within fifteen days after
receiving the August 14, 1998 Order.
We disagree. Quite the contrary, the trial court gravely abused its discretion when it
declared respondent in default despite the latters filing of an Answer.[10] Placing
respondent in default thereafter served no practical purpose.
Petitioner was lax in calling the attention of the Court to the fifteen-day period for filing
an answer. It moved to declare respondent in default only on September 20, 1998, when

the filing period had expired on August 30, 1998. The only conclusion in this case is that
petitioner has not been prejudiced by the delay. The same leniency can also be accorded
to the RTC, which declared respondent in default only on December 9, 1998, or twentytwo days after the latter had filed its Answer on November 17, 1998. Defendants Answer
should be admitted, because it had been filed before it was declared in default, and no
prejudice was caused to plaintiff. The hornbook rule is that default judgments are
generally disfavored.[11]
While there are instances when a party may be properly declared in default, these cases
should be deemed exceptions to the rule and should be resorted to only in clear cases of
obstinate refusal or inordinate neglect in complying with the orders of the court.[12] In
the present case, however, no such refusal or neglect can be attributed to respondent.
It appears that respondent failed to file its Answer because of excusable negligence. Atty.
Joel Voltaire Mayo, director of the Legal Affairs Services of CHED, had to relinquish his
position in accordance with the Memorandum dated July 7, 1998, requiring all nonCESO eligibles holding non-career positions to vacate their respective offices. It was only
on September 25, 1998, after CHED Special Order No. 63 had been issued, when he
resumed his former position. Respondent also presented a meritorious defense in its
Answer -- that it was duty-bound to pursue that state policy of protecting, fostering and
promoting the right of all citizens to affordable quality education at all levels. In stark
contrast, petitioner neither qualified for nor was ever conferred university status by
respondent.
Judges, as a rule, should avoid issuing default orders that deny litigants the chance to be
heard. Instead, the former should give the latter every opportunity to present their
conflicting claims on the merits of the controversy, as much as possible avoiding any
resort to procedural technicalities.[13]
Third Issue: Preliminary Injunction
Petitioner contends that the RTC validly issued the Writ of Preliminary Injunction.
According to the trial court, respondents actions adversely affected petitioners interests,
faculty and students. In fact, the very existence of petitioner as a business concern would
have been jeopardized had its proprietary rights not been protected.
We disagree. We concur with the CA that the trial court acted with grave abuse of
discretion in issuing the Writ of Preliminary Injunction against respondent. Petitioner
failed to establish a clear right to continue representing itself to the public as a university.
Indeed, it has no vested right to misrepresent itself. Before an injunction can be issued, it
is essential that (1) there must be a right in esse to be protected, and (2) the act against
which the injunction is to be directed must have violated such right.[14] The
establishment and the operation of schools are subject to prior authorization from the
government. No school may claim to be a university unless it has first complied with the
prerequisites provided in Section 34 of the Manual of Regulations for Private Schools.
Section 3, Rule 58 of the Rules of Court, limits the grant of preliminary injunction to

cases in which the plaintiff is clearly entitled to the relief prayed for.
We also agree with the finding of the CA that the act sought to be enjoined by petitioner
is not violative of the latters rights. Respondents Cease and Desist Order of July 30, 1997
merely restrained petitioner from using the term university in its name. It was not ordered
to close, but merely to revert to its authorized name; hence, its proprietary rights were not
violated.
Fourth Issue: Dismissal of the Complaint
Petitioner claims that the CA went beyond its limited jurisdiction under Rule 65 when it
reversed the trial court and dismissed the Complaint on the ground that petitioner had
failed to state a cause of action. The RTC had yet to conduct trial, but the CA already
determined the factual issue regarding petitioners acquisition of university status, a
determination that is not permitted in certiorari proceedings.
The CA ruled that the trial court gravely abused its discretion in denying respondents
Motion to dismiss on the ground of lack of cause of action because of petitioners lack of
legal authority or right to use the word university. Said appellate court:
x x x. No matter how we interpret the Corporation Code and the law granting the
Securities and Exchange Commission its powers and duties, there is nothing there which
grants it the power or authority to confer University Status to an educational institution.
Fundamental is the rule that when there is no power granted, none exist[s], not even
implied ones for there is none from where to infer. The mere fact of securing an alleged
Certificate of Incorporation under an unauthorized name does not confer the right to use
such name.
But what makes the conclusion of [the trial court] even anomalous, to say the least, is that
no less than the Chairman of the SEC in his letter to the [respondent] (Exh. J) expressly
said that [petitioner] never filed any Amended Articles of Incorporation so as to have a
change of corporate name to include the term university. Worse, the records officer of
DECS issued a Certification dated May 18, 1998 (Annex AA) to the effect that there was
no Indorsement made by that office addressed to the SEC or the Proposed Amended
Article of Incorporation of Indiana Aeronautics. x x x.
Under such clear pattern of deceitful maneuvering to circumvent the requirement for
acquiring University Status, it is [a] patently reversible error for [the trial court] to hold
that [petitioner] has a right to use the word University which must be protected. Dismissal
of [petitioners] Complaint for lack of a valid cause of action should have been the proper
action taken by [the trial court] judge.[15]
An order denying a motion to dismiss is interlocutory, and so the proper remedy in such a
case is to appeal after a decision has been rendered. A writ of certiorari is not intended to
correct every controversial interlocutory ruling; it is resorted to only to correct a grave
abuse of discretion or a whimsical exercise of judgment equivalent to lack of jurisdiction.

Its function is limited to keeping an inferior court within its jurisdiction and to relieve
persons from arbitrary acts -- acts which courts or judges have no power or authority in
law to perform. It is not designed to correct erroneous findings and conclusions made by
the court.[16]
In the case at bar, we find no grave abuse of discretion in the RTCs denial of the Motion
to Dismiss, as contained in the August 14, 1998 Order. The CA erred in ruling other wise.
The trial court stated in its Decision that petitioner was an educational institution,
originally registered with the Securities and Exchange Commission as the Indiana School
of Aeronautics, Inc. That name was subsequently changed to Indiana Aerospace
University after the Department of Education, Culture and Sports had interposed no
objection to such change.[17]
Respondent issued a formal Cease and Desist Order directing petitioner to stop using the
word university in its corporate name. The former also published an announcement in the
March 21, 1998 issue of Freeman, a local newspaper in Cebu City, that there was no
institution of learning by that name. The counsel of respondent was quoted as saying in
the March 28, 1998 issue of the newspaper Today that petitioner had been ordered closed
by the respondent for illegal advertisement, fraud and misrepresentation of itself as a
university. Such acts, according to the RTC undermined the publics confidence in
petitioner as an educational institution.[18] This was a clear statement of a sufficient
cause of action.
When a motion to dismiss is grounded on the failure to state a cause of action, a ruling
thereon should be based only on the facts alleged in the complaint.[19] The court must
pass upon this issue based solely on such allegations, assuming them to be true. For it to
do otherwise would be a procedural error and a denial of plaintiffs right to due process.
[20]
WHEREFORE, the Petition is hereby GRANTED IN PART, and the assailed Decision
MODIFIED. The trial court is DIRECTED to SET ASIDE the Order of default of
December 9, 1998; to ADMIT the Answer dated November 5, 1998; to LIFT the
preliminary injunction; and to CONTINUE, with all deliberate speed, the proceedings in
Civil Case No. 98-811.
SO ORDERED.

G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and
STANDARD PHILIPS CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.
MELENCIO-HERRERA, J.:
Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR
Sp. No. 20067, upholding the Order of the Securities and Exchange Commission, dated 2
January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or
removal of the word "PHILIPS" from private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of
the Netherlands, although not engaged in business here, is the registered owner of the
trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration
Nos. R-1641 and R-1674, respectively issued by the Philippine Patents Office (presently
known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners
Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial
Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and
25 May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of
Companies.
Respondent Standard Philips Corporation (Standard Philips), on the other hand, was
issued a Certificate of Registration by respondent Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint with the Securities &
Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS" from
Private Respondent's corporate name in view of the prior registration with the Bureau of
Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the
name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical
and Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of Incorporation,
Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743)
praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that
Private Respondent's use of the word PHILIPS amounts to an infringement and clear
violation of Petitioners' exclusive right to use the same considering that both parties
engage in the same business.
In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV
has no legal capacity to sue; that its use of its corporate name is not at all similar to
Petitioners' trademark PHILIPS when considered in its entirety; and that its products
consisting of chain rollers, belts, bearings and cutting saw are grossly different from
Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing
Officer, on 27 September 1985, ruled against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In
so ruling, the latter declared that inasmuch as the SEC found no sufficient ground for the
granting of injunctive relief on the basis of the testimonial and documentary evidence
presented, it cannot order the removal or cancellation of the word "PHILIPS" from
Private Respondent's corporate name on the basis of the same evidence adopted in toto
during trial on the merits. Besides, Section 18 of the Corporation Code (infra) is
applicable only when the corporate names in question are identical. Here, there is no
confusing similarity between Petitioners' and Private Respondent's corporate names as
those of the Petitioners contain at least two words different from that of the Respondent.
Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.
On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of
Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at
least two different words and, therefore, rules out any possibility of confusing one for the
other.
On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review
on Certiorari before this Court, which Petition was later referred to the Court of Appeals
in a Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of
Appeals 1 swept aside Petitioners' claim that following the ruling in Converse Rubber
Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906,
January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private
Respondent's corporate name as the same constitutes a dominant part of Petitioners'
corporate names. In so holding, the Appellate Court observed that the Converse case is
not four-square with the present case inasmuch as the contending parties in Converse are
engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the
SEC, the Appellate Court concluded that "private respondents' products consisting of
chain rollers, belts, bearings and cutting saw are unrelated and non-competing with
petitioners' products i.e. electrical lamps such that consumers would not in any
probability mistake one as the source or origin of the product of the other."
The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November
1990, hence, this Petition which was given due course on 22 April 1991, after which the
parties were required to submit their memoranda, the latest of which was received on 2
July 1991. In December 1991, the SEC was also required to elevate its records for the
perusal of this Court, the same not having been apparently before respondent Court of
Appeals.
We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court
declared that a corporation's right to use its corporate and trade name is a property right, a
right in rem, which it may assert and protect against the world in the same manner as it
may protect its tangible property, real or personal, against trespass or conversion. It is
regarded, to a certain extent, as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another corporation in the same field (Red Line
Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of a corporation
(American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160;
Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington
Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of its
existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as
to corporations is that each corporation must have a name by which it is to sue and be
sued and do all legal acts. The name of a corporation in this respect designates the
corporation in the same manner as the name of an individual designates the person
(Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg.
Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part of
the corporate franchise as any other privilege granted (Federal Secur. Co. vs. Federal
Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name identical with or
similar to one already appropriated by a senior corporation while an individual's name is
thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of
California, 56 F 2d 973, 977). A corporation can no more use a corporate name in
violation of the rights of others than an individual can use his name legally acquired so as
to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly provides that:
No corporate name may be allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing law. Where a change in a corporate name is approved,
the commission shall issue an amended certificate of incorporation under the amended
name. (Emphasis supplied)
The statutory prohibition cannot be any clearer. To come within its scope, two requisites
must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate
name; and
(2) the proposed name is either:

(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v.
Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75
Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners'
prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips
Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956,
respectively, while Respondent Standard Philips was issued a Certificate of Registration
on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also
used the trademark "PHILIPS" on electrical lamps of all types and their accessories since
30 September 1922, as evidenced by Certificate of Registration No. 1651.
The second requisite no less exists in this case. In determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such as to mislead a
person, using ordinary care and discrimination. In so doing, the Court must look to the
record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210
NE 2d 298). While the corporate names of Petitioners and Private Respondent are not
identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V.,
PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT,
INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in
that all the companies affiliated or associated with the principal corporation, PEBV, are
known in the Philippines and abroad as the PHILIPS Group of Companies.
Respondents maintain, however, that Petitioners did not present an iota of proof of actual
confusion or deception of the public much less a single purchaser of their product who
has been deceived or confused or showed any likelihood of confusion. It is settled,
however, that proof of actual confusion need not be shown. It suffices that confusion is
probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line
of cases).
It may be that Private Respondent's products also consist of chain rollers, belts, bearing
and the like, while petitioners deal principally with electrical products. It is significant to
note, however, that even the Director of Patents had denied Private Respondent's
application for registration of the trademarks "Standard Philips & Device" for chain,
rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its
subsidiaries in the Philippines equipment, machines and their parts which fall under
international class where "chains, rollers, belts, bearings and cutting saw," the goods in
connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also
belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its
Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:
To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire, dispose of,
and deal in and deal with any kind of goods, wares, and merchandise such as but not
limited to plastics, carbon products, office stationery and supplies, hardware parts,
electrical wiring devices, electrical component parts, and/or complement of industrial,
agricultural or commercial machineries, constructive supplies, electrical supplies and
other merchandise which are or may become articles of commerce except food, drugs and
cosmetics and to carry on such business as manufacturer, distributor, dealer, indentor,
factor, manufacturer's representative capacity for domestic or foreign companies.
(emphasis ours)
For its part, Philips Electrical also includes, among its primary purposes, the following:
To develop manufacture and deal in electrical products, including electronic, mechanical
and other similar products . . . (p. 30, Record of SEC Case No. 2743)
Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent
it from dealing in the same line of business of electrical devices, products or supplies
which fall under its primary purposes. Besides, there is showing that Private Respondent
not only manufactured and sold ballasts for fluorescent lamps with their corporate name
printed thereon but also advertised the same as, among others, Standard Philips (TSN,
before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As
aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its
corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said
respondent's intention to ride on the popularity and established goodwill of said
petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator
of the name or one confusingly similar thereto usually seeks an unfair advantage, a free
ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star
Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the SEC
maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC.
and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different
from that of the corporate name of respondent STANDARD PHILIPS CORPORATION,
which words will readily identify Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names
formulated by the SEC, the proposed name "should not be similar to one already used by
another corporation or partnership. If the proposed name contains a word already used as
part of the firm name or style of a registered company; the proposed name must contain
two other words different from the company already registered" (Emphasis ours). It is
then pointed out that Petitioners Philips Electrical and Philips Industrial have two words
different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was
registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use
which must be free from any infringement by similarity. A corporation has an exclusive
right to the use of its name, which may be protected by injunction upon a principle
similar to that upon which persons are protected in the use of trademarks and tradenames
(18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the
corporation which has acquired a right to that name and perhaps carried on its business
thereunder, that another should attempt to use the same name, or the same name with a
slight variation in such a way as to induce persons to deal with it in the belief that they
are dealing with the corporation which has given a reputation to the name (6 Fletcher
[Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210
F 510). Notably, too, Private Respondent's name actually contains only a single word, that
is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term
"Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation
from partnerships and other business organizations.
The fact that there are other companies engaged in other lines of business using the word
"PHILIPS" as part of their corporate names is no defense and does not warrant the use by
Private Respondent of such word which constitutes an essential feature of Petitioners'
corporate name previously adopted and registered and-having acquired the status of a
well-known mark in the Philippines and internationally as well (Bureau of Patents
Decision No. 88-35 [TM], June 17, 1988, SEC Records).
In support of its application for the registration of its Articles of Incorporation with the
SEC, Private Respondent had submitted an undertaking "manifesting its willingness to
change its corporate name in the event another person, firm or entity has acquired a prior
right to the use of the said firm name or one deceptively or confusingly similar to it."
Private respondent must now be held to its undertaking.
As a general rule, parties organizing a corporation must choose a name at their peril; and
the use of a name similar to one adopted by another corporation, whether a business or a
nonbusiness or non-profit organization if misleading and likely to injure it in the exercise
in its corporate functions, regardless of intent, may be prevented by the corporation
having the prior right, by a suit for injunction against the new corporation to prevent the
use of the name (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc.,
89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its
Resolution dated 20 November 1990, are SET ASIDE and a new one entered
ENJOINING private respondent from using "PHILIPS" as a feature of its corporate
name, and ORDERING the Securities and Exchange Commission to amend private
respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate
name of private respondent.
No costs.

SO ORDERED.