Republic of the Philippines

SUPREME COURT
Manila

resolution in question was, therefore, null and void ab initio,

being in effect a donation that was ultra vires and beyond the
powers of the corporate directors to adopt.

EN BANC

After trial, the court below rendered judgment upholding the

stand of the defendant Milling company, and dismissed the
complaint. Thereupon, plaintiffs duly appealed to this Court.

G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First
Instance of Occidental Negros, in its Civil Case No. 2603,
dismissing plaintiff's complaint that sought to compel the
defendant Milling Company to increase plaintiff's share in the
sugar produced from their cane, from 60% to 62.33%, starting
from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano,
Alejandro Montelibano, and the Limited co-partnership
Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee's sugar central mill under
identical milling contracts. Originally executed in 1919, said
contracts were stipulated to be in force for 30 years starting
with the 1920-21 crop, and provided that the resulting product
should be divided in the ratio of 45% for the mill and 55% for
the planters. Sometime in 1936, it was proposed to execute
amended milling contracts, increasing the planters' share to
60% of the manufactured sugar and resulting molasses,
besides other concessions, but extending the operation of the
milling contract from the original 30 years to 45 years. To this
effect, a printed Amended Milling Contract form was drawn
up. On August 20, 1936, the Board of Directors of the appellee
Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No.
11, Acuerdo No. 1) granting further concessions to the
planters over and above those contained in the printed
Amended Milling Contract. The bone of contention is
paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada, la

Junta en consideracion a una peticion de los plantadores
hecha por un comite nombrado por los mismos, acuerda
enmendar el contrato de molienda enmendado medientelas
siguentes:
xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de Molienda

Enmendado, lascentrales azucareras, de Negros Occidental,
cuya produccion anual de azucar centrifugado sea mas de una
tercera parte de la produccion total de todas lascentrales
azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que la estipuladas en el
presente contrato, entonces esas mejores condiciones se
concederan y por el presente se entenderan concedidas a los
platadores que hayan otorgado este Contrato de Molienda
Enmendado.
Appellants signed and executed the printed Amended Milling
Contract on September 10, 1936, but a copy of the resolution
of August 10, 1936, signed by the Central's General Manager,
was not attached to the printed contract until April 17, 1937;
with the notation
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por y la Bacolod-Murcia
Milling Co., Inc.
In 1953, the appellants initiated the present action,
contending that three Negros sugar centrals (La Carlota,
Binalbagan-Isabela and San Carlos), with a total annual
production exceeding one-third of the production of all the
sugar central mills in the province, had already granted
increased participation (of 62.5%) to their planters, and that
under paragraph 9 of the resolution of August 20, 1936,
heretofore quoted, the appellee had become obligated to
grant similar concessions to the plaintiffs (appellants herein).
The appellee Bacolod-Murcia Milling Co., inc., resisted the
claim, and defended by urging that the stipulations contained
in the resolution were made without consideration; that the

We agree with appellants that the appealed decisions can not

stand. It must be remembered that the controverted
resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling
contract, and that it was approved on August 20, 1936,
twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that
when the Milling Contract was executed, the concessions
granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why,
in the face of such concessions, the appellants should reject
them or consider them as separate and apart from the main
amended milling contract, specially taking into account that
appellant Alfredo Montelibano was, at the time, the President
of the Planters Association (Exhibit 4, p. 11) that had agitated
for the concessions embodied in the resolution of August 20,
1936. That the resolution formed an integral part of the
amended milling contract, signed on September 10, and not a
separate bargain, is further shown by the fact that a copy of
the resolution was simply attached to the printed contract
without special negotiations or agreement between the
parties.
It follows from the foregoing that the terms embodied in the
resolution of August 20, 1936 were supported by the same
causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of
its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence,
the conclusion of the court below that the resolution
constituted gratuitous concessions not supported by any
consideration is legally untenable.
All disquisition concerning donations and the lack of power of
the directors of the respondent sugar milling company to
make a gift to the planters would be relevant if the resolution
in question had embodied a separate agreement after the
appellants had already bound themselves to the terms of the
printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were
made by the company, the appellants were not yet obligated
by the terms of the printed contract, since they admittedly did
not sign it until twenty-one days later, on September 10,
1936. Before that date, the printed form was no more than a
proposal that either party could modify at its pleasure, and
the appellee actually modified it by adopting the resolution in
question. So that by September 10, 1936 defendant
corporation already understood that the printed terms were
not controlling, save as modified by its resolution of August
20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the
parties met upon that basis. Otherwise there would have been
no consent or "meeting of the minds", and no binding contract
at all. But the conduct of the parties indicates that they
assumed, and they do not now deny, that the signing of the
contract on September 10, 1936, did give rise to a binding
agreement. That agreement had to exist on the basis of the
printed terms as modified by the resolution of August 20,
1936, or not at all. Since there is no rational explanation for
the company's assenting to the further concessions asked by
the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension
of the contract period, to allow the company now to retract
such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory
of appellees. There can be no novation unless two distinct and
successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications
introduced before a bargain becomes obligatory can in no
sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of
August 20, 1936 was not attached to the printed contract until
April 17, 1937. But, except in the case of statutory forms or
solemn agreements (and it is not claimed that this is one), it is
the assent and concurrence (the "meeting of the minds") of
the parties, and not the setting down of its terms, that
constitutes a binding contract. And the fact that the
addendum is only signed by the General Manager of the
milling company emphasizes that the addition was made

solely in order that the memorial of the terms of the

agreement should be full and complete.
Much is made of the circumstance that the report submitted
by the Board of Directors of the appellee company in
November 19, 1936 (Exhibit 4) only made mention of 90%,
the planters having agreed to the 60-40 sharing of the sugar
set forth in the printed "amended milling contracts", and did
not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was
not intended to inventory all the details of the amended
contract; numerous provisions of the printed terms are alao
glossed over. The Directors of the appellee Milling Company
had no reason at the time to call attention to the provisions of
the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only
major change was paragraph 9 heretofore quoted; but when
the report was made, that paragraph was not yet in effect,
since it was conditioned on other centrals granting better
concessions to their planters, and that did not happen until
after 1950. There was no reason in 1936 to emphasize a
concession that was not yet, and might never be, in effective
operation.
There can be no doubt that the directors of the appellee
company had authority to modify the proposed terms of the
Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is
that
It is a question, therefore, in each case of the logical relation
of the act to the corporate purpose expressed in the charter. If
that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends,
and is reasonably tributary to the promotion of those ends, in
a substantial, and not in a remote and fanciful sense, it may
fairly be considered within charter powers. The test to be
applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly
incident to the express powers and reasonably necessary to
their exercise. If so, the corporation has the power to do it;
otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp.
266-268)
As the resolution in question was passed in good faith by the
board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the
court has no authority to review them.
They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or
close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the
corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to
the honest decision of officers and directors of a corporation,
and the court is without authority to substitute its judgment of
the board of directors; the board is the business manager of
the corporation, and so long as it acts in good faith its orders
are not reviewable by the courts. (Fletcher on Corporations,
Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals
of La Carlota, Hawaiian Philippines, San Carlos and Binalbagan
(which produce over one-third of the entire annual sugar
production in Occidental Negros) have granted progressively
increasing participations to their adhered planter at an
average rate of
62.333%for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the
terms of its Resolution of August 20, 1936, duty bound to
grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set
aside; and judgment is decreed sentencing the defendantappellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance
with paragraph 9 of the appellee Resolution of August 20,
1936, over and in addition to the 60% expressed in the
printed Amended Milling Contract, or the value thereof when
due, as follows:

0,333% to appellants Montelibano for the 1951-1952 crop

year, said appellants having received an additional 2%
corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop
year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential
during the time they were withheld; and the right is reserved
to plaintiffs-appellants to sue for such additional increases as
they may be entitled to for the crop years subsequent to
those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
Padilla, Bautista Angelo, Labrador, Concepcion, Barrera,
Paredes and Dizon, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-5377

December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.
Del Rosario and Garcia for appellant.
Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance
of Rizal declaring the donation made by the defendant in
favor of the minor children of the late Enrico Pirovano of the
proceeds of the insurance policies taken on his life valid and
binding, and ordering said defendant to pay to said minor
children the sum of P583,813.59, with interest thereon at the
rate of per cent from the date of filing of the complaint, plus
an additional amount equivalent to 20 per cent of said sum of
P538,813.59 as damages by way of attorney's fees and the
costs of action.
Plaintiffs herein are the minor children of the late Enrico
Pirovano represented by their mother and judicial guardian
Estefania R. Pirovano. They seek to enforce certain resolutions
adopted by the Board of Directors and stockholders of the
defendant company giving to said minor children of the
proceeds of the insurance policies taken on the life of their
deceased father Enrico Pirovano with the company as
beneficiary. Defendant's main defense is: that said resolutions
and the contract executed pursuant thereto are ultra vires,
and, if valid, the obligation to pay the amount given is not yet
due and demandable.
The trial court resolved all the issues raised by the parties in
favor of the plaintiffs and, after considering the evidence, both
oral and documentary, arrived at the following conclusions:
First. That the contract executed between the plaintiffs and
the defendant is a renumerative donation.
Second. That said contract or donation is not ultra vires,
but an act executed within the powers of the defendant
corporation in accordance with its articles of incorporation and
by laws, sanctioned and approved by its Board of Directors
and stockholders; and subsequently ratified by other
subsequent acts of the defendant company.
Third. That the said donation is in accordance with the
trend of modern and more enlightened legislation in its
treatment of questions between labor and capital.
Fourth. That the condition mentioned in the donation is null
and void because it depends on the provisions of Article 1115
of the old Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due
to the desistance of the defendant company from obeying and
doing the wishes and mandates of the majority of the
stockholders.
Sixth. That the non-payment of the debt in favor of the
National Development Company is not due to the lack of
funds, nor to lack of authority, but the desire of the President
of the corporation to preserve and continue the Government
participation in the company.
Seventh. That due demands were made by the plaintiffs
and their attorneys and these demands were rejected for no
justifiable or legal grounds.
The important facts which need to be considered for purposes
of this appeal may be briefly stated as follows: Defendant is a
corporation duly organized in accordance with law with an
authorized capital of P500,000, divided into 5,000 shares, with
a par value of P100 each share. The stockholders were:
Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100
shares, Estefania de la Rama, 100 shares, and Eliseo Hervas,
Tomas Concepcion, Antonio G. Juanco, and Gaudencio
Volasote with 5 shares each. Leonor and Estefania are
daughters of Don Esteban, while the rest his employees.
Estefania de la Rama was married to the late Enrico Pirovano
and to them four children were born who are the plaintiffs in
this case.

Enrico Pirovano became the president of the defendant

company and under his management the company grew and
progressed until it became a multi-million corporation by the
time Pirovano was executed by the Japanese during the
occupation. On May 13, 1941, the capital stock of the
corporation was increased to P2,000,000, after which a 100
per cent stock dividend was declared. Subsequently, or before
the outbreak of the war , new stock dividends of 200 per cent
and 33 1/3 per cent were again declared. On December 4,
1941, the capital stock was once more increased to
P5,000,000. Under Pirovano's management, the assets of the
company grew and increased from an original paid up capital
of around P240,000 to P15,538,024.37 by September 30,
1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically
owned and controlled the stock of the defendant corporation,
distributed his shareholding among his five daughters,
namely, Leonor, Estefania, Lourdes, Lolita and Conchita and
his wife Natividad Aguilar so that, at that time, or on July 10,
1946, the stockholding of the corporation stood as follows:
Esteban de la Rama, 869 shares, Leonor de la Rama, 3,375
shares, Estefania de la Rama, 3,368 shares, Lourdes de la
Rama, 3,368 shares, Lolita de la Rama, 3,368 shares, Conchita
de la Rama, 3,376 shares, and Natividad Aguilar, 2,136
shares. The other stockholders , namely, Eliseo Hervas, Tomas
Concepcion, Antonio Juanco, and Jose Aguilar, who were
merely employees of Don Esteban, were given 40 shares
each, while Pio Pedrosa, Marcial P. Lichauco and Rafael Roces,
one share each, because they merely represented the
National Development Company. This Company was given
representation in the Board Of Directors of the corporation
because at that time the latter had an outstanding bonded
indebtedness to the National Development Company.
This bonded indebtedness was incurred on February 26, 1940
and was in the amount of P7,500.00. The bond held by the
National Development Company was redeemable within a
period of 20 years from March 1, 1940,. bearing interest at the
rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship Co.,
Inc., and properties of Don Esteban de la Rama, as well as
those of the Hijos de I. de la Rama and Co., Inc., a sister
corporation owned by Don Esteban and his family, were
mortgaged to the National Development Company (Annexes
A, B, C, D of Exhibit 3, Deed of Trust). Payments made by the
corporation under the management of Pirovano reduced this
bonded indebtedness to P3,260,855.77.
Upon arrangement made with the National Development
Company, the outstanding bonded indebtedness was
converted into non-voting preferred shares of stock of the De
la Rama company under the express condition that they
would bear affixed cumulative dividend of 6 per cent per
annum and would be redeemable within 15 years (Exhibits 5
and 7). This conversion was carried out on September 23,
1949, when the National Development Company executed a
"Deed of Termination of Trust and Release of Mortgage" in
favor of the De la Rama company (Exhibit 6.) The immediate
effect of this conversion was the released from incumbrance
of all the properties Of Don Esteban and of the Hijos de I. de la
Rama and Co., Inc., which was apparently favorable to the
interests of the De la Rama company, but, on the other hand,
it resulted in the inconvenience that, as holder of the
preferred stock, the National Development Company, was
given to the right to 40 per cent of the membership of the
Board of Directors of the De la Rama company, which meant
an increase in the representation of the National Development
Company from 2 to 4 of the 9 members of said Board of
Directors.
The first resolution granting to the Pirovano children the
proceeds of the insurance policies taken on his life by the
defendant company was adopted by the Board of Directors at
a meeting held on July 10, 1946, (Exhibit B). This grant was
called in the resolution as "Special Payment to Minor Heirs of
the late Enrico Pirovano". Because of its direct hearing on the
issues involved in this case, said resolution is hereunder
reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO
PIROVANO
The President stated that the principal purpose for which the
meeting had been called was to discuss the advisability of
making some form of compensation to the minor heirs of the
late Enrico Pirovano, former President and General Manager of
the Company. As every member of the Board knows, said the
President, the late Enrico Pirovano who was largely
responsible for the very successful development of the
activities of the Company prior to war was killed by the

Japanese in Manila sometime in 1944 leaving as his only heirs

four minor children, Maria Carla, Esteban, Enrico and John
Albert. Early in 1941, explained the President, the Company
had insured the life of Mr. Pirovano for a million pesos.
Following the occupation of the Philippines by Japanese forces
the Company was unable to pay the premiums on those
policies issued by Filipino companies and these policies had
lapsed. But with regards to the York Office of the De la Rama
Steamship Co., Inc. had kept up payment of the premiums
from year to year. The payments made on account of these
premiums, however, are very small compared to the amount
which the Company will now receive as a result of Mr.
Pirovano's death. The President proposed therefore that out of
the proceeds of these policies the sum of P400,000 be set
aside for the minor children of the deceased, said sum of
money to be convertible into 4,000 shares of the stock of the
Company, at par, or 1,000 shares for each child. This
proposal, explained the President as being made by him upon
suggestion of President Roxas, but, he added, that he himself
was very much in favor of it also. On motion of Miss Leonor de
la Rama duly seconded by Mrs. Lourdes de la Rama de
Osmea, the following resolution was, thereupon,
unanimously approved:
Whereas, the late Enrico Pirovano, President and General
Manager of the De la Rama Steamship Company, died in
Manila sometime in November, 1944:
Whereas, the said Enrico Pirovano was largely responsible for
the rapid and very successful development of the activities of
thus company;
Whereas, early in 1941 this company insured the life of said
Enrico Pirovano in various Philippine and American Life
Insurance companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and four minor children, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed
Pirovano;lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his
heirs and it is but fit proper that this company which owes so
much to the deceased should make some provision for his
children;
Whereas, this company paid premium on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will
receive from the insurance companies sums of money greatly
in excess of the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from
the life insurance policies on the life of the late Enrico
Pirovano, the sum of P400,000 be set aside for equal division
among the 4 minor children of the deceased, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed Pirovano,
which sum of money shall be convertible into shares of stock
of the De la Rama Steamship Company, at par and, for that
purpose, that the present registered stockholders of the
corporation be requested to waive their preemptive right to
4,000 shares of the unissued stock of the company in order to
enable each of the 4 minor heirs of the deceased, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano, to obtain 1,000 shares at par;
Resolved, further, that in view of the fact that under the
provisions of the indenture with the National Development
Company, it is necessary that action herein proposed to be
confirmed by the Board of Directors of that company, the
Secretary is hereby instructed to send a copy of this resolution
to the proper officers of the National Development Company
for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946,
was submitted to the stockholders of the De la Rama
company at a meeting properly convened, and on that same
date, July 10, 1946, the same was duly approved.
It appears that, although Don Esteban and the Members of his
family were agreeable to giving to the Pirovano children the
amount of P400,000 out of the proceeds of the insurance
policies taken on the life of Enrico Pirovano, they did not
realize that when they provided in the above referred two
resolutions that said Amount should be paid in the form of
shares of stock, they would be actually giving to the Pirovano
children more than what they intended to give. This came
about when Lourdes de la Rama, wife of Sergio Osmea, Jr.,
showed to the latter copies of said resolutions and asked him
to explain their import and meaning, and it was value then
that Osmea explained that because the value then of the
shares of stock was actually 3.6 times their par value, the
donation their value, the donation, although purporting to be

only P400,00, would actually amount to a total of P1,440,000.

He further explained that if the Pirovano children would given
shares of stock in lieu of the amount to be donated, the voting
strength of the five daughters of Don Esteban in the company
would be adversely affected in the sense that Mrs. Pirovano
would be adversely affected in the sense that Mrs. Pirovano
would have a voting power twice as much as that of her
sisters. This caused Lourdes de la Rama to write to the
secretary of the corporation, Atty. Marcial Lichauco, asking
him to cancel the waiver she supposedly gave of her preemptive rights. Osmea elaborated on this matter at the
annual meeting of the stockholders held on December 12,
1946 but at said meeting it was decided to leave the matter in
abeyance pending further action on the part of the members
of the De la Rama family.
Osmea, in the meantime, took up the matter with Don
Esteban and, as consequence, the latter, on December 30,
1946, addressed to Marcial Lichauco a letter stating, among
other things, that "in view of the total lack of understanding
by me and my daughters of the two Resolutions
abovementioned, namely, Directors' and Stockholders' dated
July 10, 1946, as finally resolved by the majority of the
Stockholders and Directors present yesterday, that you
consider the abovementioned resolutions nullified." (Exhibit
CC).
On January 6, 1947, the Board of Directors of the De la Rama
company, as a consequence of the change of attitude of Don
Esteban, adopted a resolution changing the form of the
donation to the Pirovano children from a donation of 4,000
shares of stock as originally planned into a renunciation in
favor of the children of all the company's "right, title, and
interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies", subject to the
express condition that said proceeds should be retained by
the company as a loan drawing interest at the rate of 5 per
cent per annum and payable to the Pirovano children after the
company "shall have first settled in full the balance of its
present remaining bonded indebtedness in the sum of
approximately P5,000,000" (Exhibit C). This resolution was
concurred in by the representatives of the National
Development Company. The pertinent portion of the resolution
reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano
this Company renounce as it hereby renounces, all of his right,
title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies in favor of Esteban,
Maria Carla, Enrico and John Albert, all surnamed Pirovano,
subject to the terms and conditions herein after provided;
That the proceeds of said insurance policies shall be retained
by the Company in the nature of a loan drawing interest at the
rate of 5 per cent annum from the date of receipt of payment
by the Company from the various insurance companies
above-mentioned until the time the time the same amounts
are paid to the minor heirs of Enrico Pirovano previously
mentioned;
That all amounts received from the above-mentioned policies
shall be divided equally among the minors heirs of said Enrico
Pirovano;
That the company shall proceed to pay the proceeds of said
insurance policies plus interests that may have accrued to
each of the heirs of the said Enrico Pirovano or their duly
appointed representatives after the Company shall have first
settled in full the balance of its present remaining bonded
indebtedness in the sum of the approximately P5,000,000.
The above resolution was carried out by the company and
Mrs. Estefania R. Pirovano, the latter acting as guardian of her
children, by executing a Memorandum Agreement on January
10, 1947 and June 17, 1947, respectively, stating therein that
the De la Rama Steamship Co., Inc., shall enter in its books as
a loan the proceeds of the life insurance policies taken on the
life of Pirovano totalling S321,500, which loan would earn
interest at the rate of 5 per cent per annum. Mrs. Pirovano, in
executing the agreement, acted with the express authority
granted to her by the court in an order dated March 26, 1947.
On June 24, 1947, the Board of Directors approved a
resolution providing therein that instead of the interest on the
loan being payable, together with the principal, only after the
company shall have first settled in full its bonded
indebtedness, said interest may be paid to the Pirovano
children "whenever the company is in a position to met said
obligation" (Exhibit D), and on February 26, 1948, Mrs.
Pirovano executed a public document in which she formally
accepted the donation (Exhibit H). The Dela Rama company

took "official notice" of this formal acceptance at a meeting

held by its Board of Directors on February 26, 1948.
In connection with the above negotiations, the Board of
Directors took up at its meeting on July 25, 1949, the
proposition of Mrs. Pirovano to buy the house at New Rochelle,
New York, owned by the Demwood Realty, a subsidiary of the
De la Rama company at its original costs of $75,000, which
would be paid from the funds held in trust belonging to her
minor children. After a brief discussion relative to the matter,
the proposition was approved in a resolution adopted on the
same date.
The formal transfer was made in an agreement signed on
September 5, 1949 by Mrs. Pirovano, as guardian of her
children, and by the De la Rama company, represented by its
new General Manager, Sergio Osmea, Jr. The transfer of this
property was approved by the court in its order of September
20, 1949.lawphil.net
On September 13, 1949, or two years and 3 months after the
donation had been approved in the various resolutions herein
above mentioned, the stockholders of the De la Rama
company formally ratified the donation (Exhibit E), with
certain clarifying modifications, including the resolution
approving the transfer of the Demwood property to the
Pirovano children. The clarifying modifications are quoted
hereunder:
1.
That the payment of the above-mentioned donation
shall not be affected until such time as the Company shall
have first duly liquidated its present bonded indebtedness in
the amount of P3,260,855.77 with The National Development
Company, or fully redeemed the preferred shares of stock in
the amount which shall be issued to the National
Development Company in lieu thereof;
2.
That any and all taxes, legal fees, and expenses in
any way connected with the above transaction shall be
chargeable and deducted from the proceeds of the life
insurance policies mentioned in the resolutions of the Board of
Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation,
Sergio Osmea, Jr., addressed an inquiry to the Securities and
Exchange Commission asking for opinion regarding the
validity of the donation of the proceeds of the insurance
policies to the Pirovano children. On June 20, 1950 that office
rendered its opinion that the donation was void because the
corporation could not dispose of its assets by gift and
therefore the corporation acted beyond the scope of its
corporate powers. This opinion was submitted to the Board of
Directors at its meting on July 12, 1950, on which occasion the
president recommend that other legal ways be studied
whereby the donation could be carried out. On September 14,
1950, another meeting was held to discuss the propriety of
the donation. At this meeting the president expressed the
view that, since the corporation was not authorized by its
charter to make the donation to the Pirovano children and the
majority of the stockholders was in favor of making provision
for said children, the manner he believed this could be done
would be to declare a cash dividend in favor of the
stockholders in the exact amount of the insurance proceeds
and thereafter have the stockholders make the donation to
the children in their individual capacity. Notwithstanding this
proposal of the president, the board took no action on the
matter, and on March 8, 1951, at a stockholders' meeting
convened on that date the majority of the stockholders' voted
to revoke the resolution approving the donation to the
Pirovano children. The pertinent portion of the resolution
reads as follows:
Be it resolved, as it is hereby resolved, that in view of the
failure of compliance with the above conditions to which the
above donation was made subject, and in view of the opinion
of the Securities and Exchange Commissioner, the
stockholders revoke, rescind and annul, as they do thereby
revoke, rescind and annul, its ratification and approval on
September 13, 1949 of the aforementioned resolution of the
Board of Directors of January 6, 1947, as amended on June 24,
1947. (Exhibit T)
In view of the resolution declaring that the corporation failed
to comply with the condition set for the effectivity of the
donation and revoking at the same time the approval given to
it by the corporation, and considering that the corporation can
no longer set aside said donation because it had no longer set
aside said donation because it had long been perfected and
consummated, the minor children of the late Enrico Pirovano,
represented by their mother and guardian, Estefania R. de
Pirovano, demanded the payment of the credit due them as of
December 31, 1951, amounting to P564,980.89, and this

payment having been refused, they instituted the present

action in the Court of First Instance of Rizal wherein they
prayed that the be granted an alternative relief of the
following tenor: (1) sentencing defendant to pay to the
plaintiff the sum of P564,980.89 as of December 31, 1951,
with the corresponding interest thereon; (2) as an alternative
relief, sentencing defendant to pay to the plaintiffs the
interests on said sum of P564,980.89 at the rate of 5 per cent
per annum, and the sum of P564,980.89 after the redemption
of the preferred shares of the corporation held by the National
Development Company; and (3) in any event, sentencing
defendant to pay the plaintiffs damages in the amount of not
less than 20 per cent of the sum that may be adjudged to the
plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be
determined in order to reach a decision in this appeal are: (1)
Is the grant of the proceeds of the insurance policies taken on
the life of the late Enrico Pirovano as embodied in the
resolution of the Board of Directors of defendant corporation
adopted on January 6, 1947 and June 24, 1947 a remunerative
donation as found by the lower court?; (2) IN the affirmative
case, has that donation been perfected before its rescission or
nullification by the stockholders of the corporation on March 8,
1951?; (3) Can defendant corporation give by way of donation
the proceeds of said insurance policies to the minor children
of the late Enrico Pirovano under the law or its articles of
corporation, or is that donation an ultra vires act?; and (4) has
the defendant corporation, by the acts it performed
subsequent to the granting of the donation, deliberately
prevented the fulfillment of the condition precedent to the
payment of said donation such that it can be said it has
forfeited its right to demand its fulfillment and has made the
donation entirely due and demandable?
We will discuss these issues separately.
1.
To determine the nature of the grant made by the
defendant corporation to the minor children of the late Enrico
Pirovano, we do not need to go far nor dig into the voluminous
record that lies at the bottom of this case. We do not even
need to inquire into the interest which has allegedly been
shown by President Roxas in the welfare of the children of his
good friend Enrico Pirovano. Whether President Roxas has
taken the initiative in the move to give something to said
children which later culminated in the donation now in
dispute, is of no moment for the fact is that, from the mass of
evidence on hand, such a donation has been given the full
indorsement and encouraging support by Don Esteban de la
Rama who was practically the owner of the corporation. We
only need to fall back to accomplish this purpose on the
several resolutions of the Board of Directors of the
corporations containing said grant for they clearly state the
reasons and purposes why the donation has been given.
Before we proceed further, it is convenient to state here in
passing that, before the Board of Directors had approved its
resolution of January 6, 1947, as later amended by another
resolution adopted on June 24, 1947, the corporation had
already decided to give to the minor children of the late Enrico
Pirovano the sum of P400,000 out of the proceeds of the
insurance policies taken on his life in the form of shares, and
that when this form was considered objectionable because its
result and effect would be to give to said children a much
greater amount considering the value then of the stock of the
corporation, the Board of Directors decided to amend the
donation in the form and under the terms stated in the
aforesaid resolutions. Thus, in the original resolution approved
by the Board of Directors on July 10, 1946, wherein the
reasons for granting the donation to the minor children of the
late Enrico Pirovano were clearly, we find out the following
revealing statements:
Whereas, the late Enrico Pirovano President and General
Manager of the De la Rama Steamship Company, died in
Manila sometime in November, 1944;
Whereas, the said Enrico Pirovano was largely responsible for
the rapid and very successful development of the activities of
this company;
Whereas, early in 1941 this company insured the life of said
Enrico Pirovano in various Philippine and American Life
Insurance companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and 4 minor children, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to
his heirs and it is but fit and proper that this company which

owes so much to the deceased should make some provisions

for his children;
Whereas, this company paid premiums on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will
receive from the insurance companies sums of money greatly
in excess of the premiums paid by the company,
Again, in the resolution approved by the Board of Directors on
January 6, 1947, we also find the following expressive
statements which are but a reiteration of those already
expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General
Manager of the De la Rama Steamship Co., Inc., died in Manila
sometime during the latter part of the year 1944;
Whereas, the said Enrico Pirovano was to a large extent
responsible for the rapid and very successful development
and expansion of the activities of this company;
Whereas, early in 1941, the life of the said Enrico Pirovano
was insured in various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert,
all surnamed Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to
his heirs and it is but fit and proper that this Company which
owes so much to the deceased should make some provision
for his children;
Be it resolved, that out of gratitude to the late Enrico Pirovano
this Company renounce as it hereby renounces, . . . .
From the above it clearly appears that the corporation thought
of giving the donation to the children of the late Enrico
Pirovano because he "was to a large extent responsible for the
rapid and very successful development and expansion of the
activities of this company"; and also because he "left
practically nothing to his heirs and it is but fit and proper that
this company which owes so much to the deceased should
make some provision to his children", and so, the donation
was given "out of gratitude to the late Enrico Pirovano." We do
not need to stretch our imagination to see that a grant or
donation given under these circumstances is remunerative in
nature in contemplation of law.
That which is made to a person in consideration of his merits
or for services rendered to the donor, provided they do not
constitute recoverable debts, or that in which a burden less
than the value of the thing given is imposed upon the donee,
is also a donation." (Art. 619, old Civil Code.)
In donations made to a person for services rendered to the
donor, the donor's will is moved by acts which directly benefit
him. The motivating cause is gratitude, acknowledgment of a
favor, a desire to compensate. A donation made to one who
saved the donor's life, or a lawyer who renounced his fees for
services rendered to the donor, would fall under this class of
donations. These donations are called remunerative donations
. (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676;
Manresa, 5th ed., pp. 72-73.)
2.
The next question to be determined is whether the
donation has been perfected such that the corporation can no
longer rescind it even if it wanted to. The answer to this
question cannot but be in the affirmative considering that the
same has not only been granted in several resolutions duly
adopted by the Board of Directors of the defendant
corporation, and in all these corporate acts the concurrence of
the representatives of the National Development Company,
the only creditor whose interest may be affected by the
donation, has been expressly given. The corporation has even
gone further. It actually transferred the ownership of the credit
subject of donation to the Pirovano children with the express
understanding that the money would be retained by the
corporation subject to the condition that the latter would pay
interest thereon at the rate of 5 per cent per annum payable
whenever said corporation may be in a financial position to do
so. Thus, the following acts of the corporation as reflected
from the evidence bear this out:
(a)
The donation was embodied in a resolution duly
approved by the Board of Directors on January 6, 19437. In
this resolution, the representatives of the National
Development Company, have given their concurrence. This is
the only creditor which can be considered as being adversely
affected by the donation. The resolution of June 24, 1947 did
not modify the substance of the former resolution for it merely
provided that instead of the interest on the loan being

payable, together with the principal, only after the corporation

had first settled in full its bonded indebtedness, said interest
would be paid "whenever the company is in a position to meet
said obligation."
(b)
The resolution of January 6, 1947 was actually
carried out when the company and Mrs. Estefania R. Pirovano,
executed a memorandum agreement stating therein hat the
proceeds of the insurance policies would be entered in the
books of the corporation as a loan which would bear an
interest at the rate of 5 per cent per annum, and said
agreement was signed by Mrs. Pirovano as judicial guardian of
her children after she had been expressly authorized by the
court to accept the donation in behalf of her children.
(c)
While the donation can be considered as duly
executed by the execution of the document stated in the
preceding paragraph, and by the entry in the books of the
corporation of the donation as a loan, a further record of said
execution was made when Mrs. Pirovano executed a public
document on February 26, 1948 making similar acceptance of
the donation. And this acceptance was officially recorded by
the corporation when on the same date its Board of Directors
approved a resolution taking "official notice" of said
acceptance.
(d)
On July 25, 1949, the Board of Directors approved the
proposal of Mrs. Pirovano to buy the house at New Rochelle,
New York, owned by a subsidiary of the corporation at the
costs of S75,000 which would be paid from the sum held in
trust belonging to her minor children. And this agreement was
actually carried out in a document signed by the general
manager of the corporation and by Mrs. Pirovano, who acted
on the matter with the express authority of the court.
(e)
And on September 30, 1949, or two years and 3
months after the donation had been executed, the
stockholders of the defendant corporation formally ratified
and gave approval to the donation as embodied in the
resolutions above referred to, subject to certain modifications
which did not materially affect the nature of the donation.
There can be no doubt from the foregoing relation of facts the
donation was a corporate act carried out by the corporation
not only with the sanction of its Board of Directors but also of
its stockholders. It is evident that the donation has reached
the stage of perfection which is valid and binding upon the
corporation and as such cannot be rescinded unless there is
exists legal grounds for doing so. In this case, we see none.
The two reasons given for the rescission of said donation in
the resolution of the corporation adopted on March 8, 1951, to
wit: that the corporation failed to comply with the conditions
to which the above donation was made subject, and that in
the opinion of the Securities and Exchange Commission said
donation is ultra vires, are not, in our opinion, valid and legal
as to justify the rescission of a perfected donation. These
reasons, as we will discuss in the latter part of this decision,
cannot be invoked by the corporation to rescind or set at
naught the donation, and the only way by which this can be
done is to show that the donee has been in default, or that the
donation has not been validly executed, or is illegal or ultra
vires, and such is not the case as we will see hereafter. We
therefore declare that the resolution approved by the
stockholders of the defendant corporation on March 8, 1951
did not and cannot have the effect of nullifying the donation in
question.
3.
The third question to be determined is: Can
defendant corporation give by way of donation the proceeds
of said insurance policies to the minor children of the late
Enrico Pirovano under the law or its articles of corporation, or
is that donation an ultra vires act? To answer this question it is
important for us to examine the articles of incorporation of the
De la Rama company to see this question it is important for us
to examine the articles of incorporation of the De la Rama
company to see if the act or donation is outside of their scope.
Paragraph second of said articles provides:
Second. The purposes for which said corporation is formed
are:
(a)
To purchase, charter, hire, build, or otherwise acquire
steam or other ships or vessels, together with equipments and
furniture therefor, and to employ the same in conveyance and
carriage of goods, wares and merchandise of every
description, and of passengers upon the high seas.
(b)
To sell, let, charter, or otherwise dispose of the said
vessels or other property of the company.
(c)

To carry on the business of carriers by water.

(d)
To carry on the business of shipowners in all of its
branches.
(e)
To purchase or take on lease, lands, wharves, stores,
lighters, barges and other things which the company may
deem necessary or advisable to be purchased or leased for
the necessary and proper purposes of the business of the
company, and from time to time to sell the dispose of the
same.
(f)
To promote any company or companies for the
purposes of acquiring all or any of the property or liabilities of
this company, or both, or for any other purpose which may
seem directly or indirectly calculated to benefit the company.
(g)
To invest and deal with the moneys of the company
and immediately required, in such manner as from time to
time may be determined.
(h)
To borrow, or raise, or secure the payment of money
in such manner as the company shall think fit.
(i)
Generally, to do all such other thing and to transact
all business as may be directly or indirectly incidental or
conducive to the attainment of the above object, or any of
them respectively.
(j)
Without in any particular limiting or restricting any of
the objects and powers of the corporation, it is hereby
expressly declared and provided that the corporation shall
have power to issue bonds and provided that the corporation
shall have power to issue bonds and other obligations, to
mortgage or pledge any stocks, bonds or other obligations or
any property which may be required by said corporations; to
secure any bonds, guarantees or other obligations by it issued
or incurred; to lend money or credit to and to aid in any other
manner any person, association, or corporation of which any
obligation or in which any interest is held by this corporation
or in the affairs or prosperity of which this corporation or in
the affairs or prosperity of which this corporation has a lawful
interest, and to do such acts and things as may be necessary
to protect, preserve, improve, or enhance the value of any
such obligation or interest; and, in general, to do such other
acts in connection with the purposes for which this
corporation has been formed which is calculated to promote
the interest of the corporation or to enhance the value of its
property and to exercise all the rights, powers and privileges
which are now or may hereafter be conferred by the laws of
the Philippines upon corporations formed under the Philippine
Corporation Act; to execute from time to time general or
special powers of attorney to persons, firms, associations or
corporations either in the Philippines, in the United States, or
in any other country and to revoke the same as and when the
Directors may determine and to do any and or all of the things
hereinafter set forth and to the same extent as natural
persons might or could do.
After a careful perusal of the provisions above quoted we find
that the corporation was given broad and almost unlimited
powers to carry out the purposes for which it was organized
among them, (1) "To invest and deal with the moneys of the
company not immediately required, in such manner as from
time to time may be determined" and, (2) "to aid in any other
manner any person, association, or corporation of which any
obligation or in which any interest is held by this corporation
or in the affairs or prosperity of which this corporation has a
lawful interest." The world deal is broad enough to include any
manner of disposition, and refers to moneys not immediately
required by the corporation, and such disposition may be
made in such manner as from time to time may be
determined by the corporations. The donation in question
undoubtedly comes within the scope of this broad power for it
is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were
given away. In fact, the evidence shows that the corporation
declared a 100 per cent cash dividend, or P2,000,000, and
later on another 30 per cent cash dividend. This is clear proof
of the solvency of the corporation. It may be that, as
insinuated, Don Esteban wanted to make use of the insurance
money to rehabilitate the central owned by a sister
corporation, known as Hijos de I. de la Rama and Co., Inc.,
situated in Bago, Negros Occidental, but this, far from
reflecting against the solvency of the De la Rama company,
only shows that the funds were not needed by the
corporation.
Under the second broad power we have the above stated, that
is, to aid in any other manner any person in the affairs and
prosperity of whom the corporation has a lawful interest, the
record of this case is replete with instances which clearly
show that the corporation knew well its scope and meaning so
much so that, with the exception of the instant case, no one

has lifted a finger to dispute their validity. Thus, under this

broad grant of power, this corporation paid to the heirs of one
Florentino Nonato, an engineer of one of the ships of the
company who died in Japan, a gratuity of P7,000, equivalent
to one month salary for each year of service. It also gave to
Ramon Pons, a captain of one of its ships , a retirement
gratuity equivalent to one month salary for every year of
service, the same to be based upon his highest salary. And it
contributed P2,000 to the fund raised by the Associated
Steamship Lines for the widow of the late Francis Gispert,
secretary of said Association, of which the De la Rama
Steamship Co., Inc., was a member along with about 30 other
steamship companies. In this instance, Gispert was not even
an employee of the corporation. And invoking this vast power,
the corporation even went to the extent of contributing
P100,000 to the Liberal Party campaign funds, apparently in
the hope that by conserving its cordial relations with that
party it might continue to retain the patronage of the
administration. All these acts executed before and after the
donation in question have never been questioned and were
willingly and actually carried out.
We don't see much distinction between these acts of
generosity or benevolence extended to some employees of
the corporation, and even to some in whom the corporation
was merely interested because of certain moral or political
considerations, and the donation which the corporation has
seen fit to give to the children of the late Enrico Pirovano from
the point of view of the power of the corporation as expressed
in its articles of incorporation. And if the former had been
sanctioned and had been considered valid and intra vires, we
see no plausible reasons why the latter should now be
deemed ultra vires. It may perhaps be argued that the
donation given to the children of the late Enrico Pirovano is so
large and disproportionate that it can hardly be considered a
pension of gratuity that can be placed on a par with the
instances above mentioned, but this argument overlooks one
consideration: the gratuity here given was not merely
motivated by pure liberality or act of generosity, but by a
deep sense of recognition of the valuable services rendered
by the late Enrico Pirovano which had immensely contributed
to the growth of the corporation to the extent that from its
humble capitalization it blossomed into a multi-million
corporation that it is today. In other words of the very
resolutions granting the donation or gratuity, said donation
was given not only because the company was so indebted to
him that it saw fit and proper to make provisions for his
children, but it did so out of a sense of gratitude. Another
factor that we should bear in mind is that Enrico Pirovano was
not only a high official of the company but was at the same
time a member of the De la Rama family, and the recipient of
the donation are the grandchildren of Don Esteban de la
Rama. This we, may say, is the motivating root cause behind
the grant of this bounty.
It may be contended that a donation is different from a
gratuity. While technically this may be so in substance they
are the same. They are even similar to a pension. Thus, it was
granted for services previously rendered, and which at the
time they were rendered gave rise to no legal obligation. "
(Words and Phrases, Permanent Edition, p. 675; O'Dea vs.
Cook,, 169 Pac., 306, 176 Cal., 659.) Or stated in another way,
a "Gratuity is mere bounty given by the Government in
consideration or recognition or meritorious services and
springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930)
or "A gratuity is something given freely, or without
recompense, a gift, something voluntarily given in return for a
favor or services; a bounty; a tip." Wood Mercantile Co. vs.
Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533, 43
Off. Gaz. p. 4633. We do not see much difference between this
definition of gratuity and a remunerative donation
contemplated in the Civil Code. In essence they are the same.
Such being the case, it may be said that this donation is
gratuity in a large sense for it was given for valuable services
rendered an ultra vires act in the light of the following
authorities:
Indeed, some cases seem to hold that the giving of a pure
gratuity to directors is ultra vires of corporation, so that it
could not be legalized even if the approval of the
shareholders; but this position has no sound reason to support
it, and is opposed to the weight of authority (Suffaker vs.
Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46 L.R.A.
384).
But although business corporations cannot contribute to
charity or benevolence, yet they are not required always to
insist on the full extent of their legal rights. They are not
forbidden for the recognizing moral obligation of which strict
law takes no cognizance. They are not prohibited from
establishing a reputation for board, liberal, equitable dealing

which may stand them in good stead in competition with less

fair rivals. Thus, an incorporated fire insurance company
which policies except losses from explosions may
nevertheless pay a loss from that cause when other
companies are accustomed to do so, such liberal dealing
being deemed conducive to the prosperity of the corporation."
(Modern Law of Corporations, Machen, Vol. 1, p. 81).
So, a bank may grant a five years pension to the family at one
of its officers. In all cases in this sorts, the amount of the
gratuity rests entirely within the discretion of the company,
unless indeed it be all together out of the reason and fitness.
But where the company has ceased to be going concerned,
this power to make gifts or present it at the end. (Modern Law
of Corporations, Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital. There seems on
principle no reason to doubt that gifts or gratuities wherever
they are lawful may be paid out of capital as well as out of
profits. (Modern Law of corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind
by express provisions. Enough has been said to show that
the implied powers of a corporation to give gratuities to its
servants and officers, as well as to strangers, are ample, so
that there is therefore no need to supplement them by
express provisions." (modern Law of Corporations, Machen,
Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano
children is outside the scope of the powers of the defendant
corporation, or the scope of the powers that it may exercise
under the law, or it is an ultra vires act, still it may said that
the same can not be invalidated, or declared legally
ineffective for the reason alone, it appearing that the donation
represents not only the act of the Board of Directors but of the
stockholders themselves as shown by the fact that the same
has been expressly ratified in a resolution duly approved by
the latter. By this ratification, the infirmity of the corporate
act, it may has been obliterated thereby making the cat
perfectly valid and enforceable. This is specially so if the
donation is not merely executory but executed and
consummated and no creditors are prejudice, or if there are
creditors affected, the latter has expressly given their
confirmity.
In making this pronouncement, advertence should made of
the nature of the ultra vires act that is in question. A little
digression needs be made on this matter to show the different
legal effect that may result consequent upon the performance
of a particular ultra vires act on the part of the corporation.
may authorities may be cited interpreting or defining, extent,
and scope of an ultra vires act, but all of them are uniform
and unanimous that the same may be either an act performed
merely outside the scope of the powers granted to it by it
articles of incorporation, or one which is contrary to law or
violative of any principle which will void any contract whether
done individually or collectively. In other words, a distinction
should be made between corporate acts or contracts which
are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law,
morals, or public policy or public duty, and are, like similar
transactions between the individuals void. They cannot serve
as basis of a court action, nor require validity ultra vires acts
on the other hand, or those which are not illegal and void ab
initio, but are merely within are not illegal and void ab initio,
but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders.
Strictly speaking, an ultra vires act is one outside the scope of
the power conferred by the legislature, and although the term
has been used indiscriminately, it is properly distinguishable
from acts which are illegal, in excess or abuse of power, or
executed in an unauthorized manner, or acts within corporate
powers but outside the authority of particular officers or
agents (19 C. J. S. 419).
Corporate transactions which are illegal because prohibited by
statute or against public policy are ordinarily void and
unenforceable regardless of the part performance, ratification,
or estoppel; but general prohibitions against exceeding
corporate powers and prohibitions intended to protect a
particular class or specifying the consequences of violation
may not preclude enforcement of the transaction and an
action may be had for the part unaffected by the illegality or
for equitable restitution. (19 C.J.S. 421.)
Generally, a transaction within corporate powers but executed
in an irregular or unauthorized manner is voidable only, and
may become enforceable by reason of ratification or express
or implied assent by the stockholders or by reason of estoppel

of the corporation or the other party to the transaction to

raise the objection, particularly where the benefits are
retained
As appears in paragraphs 960-964 supra, the general rule is
that a corporation must act in the manner and with the
formalities, if any, prescribed by its character or by the
general law. However, a corporation transaction or contract
which is within the corporation powers, which is neither wrong
in itself nor against public policy, but which is defective from a
failure to observe in its execution a requirement of law
enacted for the benefit or protection of a certain class, is
voidable and is valid until avoided, not void until validated;
the parties for whose benefit the requirement was enacted
may ratify it or be estoppel to assert its invalidity, and third
persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its
granted powers. (19 C.J.S., 423-24.)
It is true that there are authorities which told that ultra vires
acts, or those performed beyond the powers conferred upon
the corporation either by law or by its articles of
incorporation, are not only voidable, but wholly void and of no
legal effect, and that such acts cannot be validated by
ratification or be the basis of any action in court; but such
ruling does not constitute the weight of authority, the reason
being that they fail to make the important distinction we have
above adverted to. Because rule has been rejected by most of
the state courts and even by the modern treaties or
corporations (7 Flethcer, Cyc. Corps., 563-564). And now it
can be said that the majority of the cases hold that acts which
are merely ultra vires, or acts which are not illegal, may be
ratified by the stockholders of a corporation (Brooklyn Heights
R. Co. vs. Brooklyn City R. Co., 135 N.Y. Supp. 1001).
Strictly speaking, an act of a corporation outside of its
character powers is just as such ultra vires where all the
stockholders consent thereto as in a case where none of the
stockholders expressly or cannot be ratified so as to make it
valid, even though all the stockholders consent thereto; but
inasmuch as the stockholders in reality constitute the
corporation, it should , it would seem, be estopped to allege
ultra vires, and it is generally so held where there are no
creditors, or the creditors are not injured thereby, and where
the rights of the state or the public are not involved, unless
the act is not only ultra vires but in addition illegal and void. of
course, such consent of all the stockholders cannot adversely
affect creditors of the corporation nor preclude a proper
attack by the state because of such ultra vires act. (7 Fletcher
Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under
consideration is illegal, or contrary to any of the express
provision of the articles of incorporation, nor prejudicial to the
creditors of the defendant corporation, we cannot but logically
conclude, on the strength of the authorities we have quoted
above, that said donation, even if ultra vires in the supposition
we have adverted to, is not void, and if voidable its infirmity
has been cured by ratification and subsequent acts of the
defendant corporation. The defendant corporation, therefore,
is now prevented or estopped from contesting the validity of
the donation. This is specially so in this case when the very
directors who conceived the idea of granting said donation are
practically the stockholders themselves, with few nominal
exception. This applies to the new stockholder Jose Cojuangco
who acquired his interest after the donation has been made
because of the rule that a "purchaser of shares of stock
cannot avoid ultra vires acts of the corporation authorized by
its vendor, except those done after the purchase" (7 Fletcher,
Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco,
19 Phil., 82.) Indeed, how can the stockholders now pretend to
revoke the donation which has been partly consummated?
How can the corporation now set at naught the transfer made
to Mrs. Pirovano of the property in New York, U.S.A., the price
of which was paid by her but of the proceeds of the insurance
policies given as donation. To allow the corporation to undo
what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra
vires cannot be set up or availed of in completed transactions
(7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19 C.J.S., 431).
4.
We now come to the fourth and last question that the
defendant corporation, by the acts it has performed
subsequent to the granting of the donation, deliberately
prevented the fulfillment of the condition precedent to the
payment of said donation such that it can be said it has
forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board
of Directors adopted on July 10, 1946 which provided for the
donation of P400,000 out of the proceeds which the De la
Rama company would collect on the insurance policies taken

on the life of the late Enrico Pirovano was, as already stated

above, amended on January 6, 1947 to include, among the
conditions therein provided, that the corporation shall proceed
to pay said amount, as well as the interest due thereon, after
it shall have settled in full balance of its bonded indebtedness
in the sum of P5,000,000. It should be recalled that on
September 13, 1949, or more than 2 years after the last
amendment referred too above, the stockholders adopted
another resolution whereby they formally ratified said
donation but subject to the following clarifications: (1) that the
amount of the donation shall not be effected until such time
as the company shall have first duly liquidated its present
bonded indebtedness in the amount of P3,260,855.77 to the
National Development Company, or shall have first fully
redeemed the preferred shares of stock in the amount to be
issued to said company in lieu thereof, and (2) that any and
all taxes, legal fees, and expenses connected with the
transaction shall be chargeable from the proceeds of said
insurance policies.
The trial court, in considering these conditions in the light of
the acts subsequently performed by the corporation in
connection with the proceeds of the insurance policies,
considered said conditions null and void, or at most not
written because in its pinion their non-fulfillment was due to a
deliberate desistance of the corporation and not to lack of
funds to redeem the preferred shares of the National
Development Company. The conclusions arrived at by the trial
court on this point are as follows:
Fourth. that the condition mentioned in the donation is null
and void because it depends on the exclusive will of the
donor, in accordance with the provisions of Article 1115 of the
Old Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due
to the desistance of the defendant company from obeying and
doing the wishes and mandate of the majority of the
stockholders.
Sixth. That the non-payment of the debt in favor of the
National Development Company is due to the lack of funds,
nor to lack of authority, but to the desire of the President of
the corporation to preserve and continue the Government
participation in the company.
To this views of the trial court, we fail to agree. There are
many factors we can consider why the failure to immediately
redeem the preferred shares issued to the National
Development Company as desired by the minor children of
the late Enrico Pirovano cannot or should not be attributed to
a mere desire on the part of the corporation to delay the
redemption, or to prejudice the interest of the minors, but
rather to protect the interest of the corporation itself. One of
them is the text of the very resolution approved by the
National Development Company on February 18, 1949 which
prescribed the terms and conditions under which it expressed
its conformity to the conversion of the bonded indebtedness
into preferred shares of stock. The text of the resolution above
mentioned reads:
Resolved: That the outstanding bonded indebtedness of the
Dela Rama Steamship Co., Inc., in the approximate amount of
P3,260,855.77 be converted into non-voting preferred shares
of stock of said company, said shares to bear a fixed dividend
of 6 percent per annum which shall be cumulative and
redeemable within 15 years. Said shares shall be preferred as
to assets in the event of liquidation or dissolution of said
company but shall be non-participating.
It is plain from the text of the above resolution that the
defendant corporation had 15 years from February 18, 1949,
or until 1964, within which to effect the redemption of the
preferred shares issued to the National Development
Company. This condition cannot but be binding and obligatory
upon the donees, if they desire to maintain the validity of the
donation, for it is not only the basis upon which the
stockholders of the defendant corporation expressed their
willingness to ratify the donation, but it is also by way which
its creditor, the National Development Company, would want
it to be. If the defendant corporation is given 15 years within
which to redeem the preferred shares, and that period would
expire in 1964, one cannot blame the corporation for availing
itself of this period if in its opinion it would redound to its best
interest. It cannot therefore be said that the fulfillment of the
condition for the payment of the donation is one that wholly
depends on the exclusive will of the donor, as the lower court
has concluded, simply because it failed to meet the
redemption of said shares in her manner desired by the
donees. While it may be admitted that because of the
disposition of the assets of the corporation upon the
suggestion of its general manager more than enough funds

had been raised to effect the immediate redemption of the

above shares, it is not correct to say that the management
has completely failed in its duty to pay its obligations for,
according to the evidence, a substantial portion of the
indebtedness has been paid and only a balance of about
P1,805,169.98 was outstanding when the stockholders of the
corporation decided to revoke or cancel the donation. (Exhibit
P.)
But there are other good reasons why all the available funds
have not been actually applied to the redemption of the
preferred shares, one of them being the "desire of the
president of the corporation to preserve and continue the
government participation in the company" which even the
lower court found it to be meritorious, which is one way by
which it could continue receiving the patronage and
protection of the government. Another reason is that the
redemption of the shares does not depend on the will of the
corporation alone but to a great extent on the will of a third
party, the National Development Company. In fact, as the
evidence shows, this Company had pledged these shares to
the Philippine National Bank and the Rehabilitation Finance
Corporation as a security to obtain certain loans to finance the
purchase of certain ships to be built for the use of the
company under management contract entered into between
the corporation and the National Development Company, and
this was what prevented the corporation from carrying out its
offer to pay the sum P1,956,513.07 on April 5, 1951. Had this
offer been accepted, or favorably acted upon by the National
Development Company, the indebtedness would have been
practically liquidated, leaving outstanding only one certificate
worth P217,390.45. Of course, the corporation could have
insisted in redeeming the shares if it wanted to even to the
extent of taking a court action if necessary to force its creditor
to relinquish the shares that may be necessary to accomplish
the redemption, but such would be a drastic step which would
have not been advisable considering the policy right along
maintained by the corporation to preserve its cordial and
smooth relation with the government. At any rate, whether
such attitude be considered as a mere excuse to justify the
delay in effecting the redemption of the shares, or a mere
desire on the part of the corporation to retain in its possession
more funds available to attend to other pressing need as
demanded by the interest of the corporation, we fail to see in
such an attitude an improper motive to circumvent the early
realization of the desire of the minors to obtain the immediate
payment of the donation which was made dependent upon
the redemption of said shares there being no clear evidence
that may justify such design. Anyway, a great portion of the
funds went to the stockholders themselves by way of
dividends to offset, so it appears, the huge advances that the
corporation had made to them which were entered in the
books of the corporation as loans and, therefore, they were
invested for their own benefit. As General Manager Osmea
said, "we were first confronted with the problem of the
withdrawals of the family which had to be repaid back to the
National Development Company and one of the most practical
solutions to that was to declare dividends and reduce the
amounts of their withdrawals", which then totalled about
P3,000,000.
All things considered, we are of the opinion that the finding of
the lower court that the failure of the defendant corporation to
comply with the condition of the donation is merely due to its
desistance from obeying the mandate of the majority of the
stockholders and not to lack of funds, or to lack of authority,
has no foundation in law or in fact, and, therefore, its
conclusion that because of such desistance that condition
should be deemed as fulfilled and the payment of the
donation due and demandable, is not justified. In this respect,
the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it
unnecessary to discuss the other issues raised by the parties
in their briefs.
The lower court adjudicated to plaintiff an additional amount
equivalent to 20 per cent of the amount claimed as damages
by way of attorney's fees, and in our opinion, this award can
be justified under Article 2208, paragraph 2, of the new Civil
Code, which provides: "When the defendant's act or omission
has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest", attorney's fees nay be
awarded as damages. However, the majority believes that this
award should be reduced to 10 per cent.
Wherefore, the decision appealed from should be modified as
follows: (a) that the donation made in favor of the children of
the late Enrico Pirovano of the proceeds of the insurance
policies taken on his life is valid and binding on the defendant
corporation, (b) that said donation, which amounts to a total
of P583,813.59, including interest, as it appears in the books

of the corporation as of August 31, 1951, plus interest thereon

at the rate of 5 per cent per annum from the filing of the
complaint, should be paid to the plaintiffs after the defendant
corporation shall have fully redeemed the preferred shares
issued to the National Development Company under the
terms and conditions stated in the resolutions of the Board of
Directors of January 6, 1947 and June 24, 1947, as amended
by the resolution of the stockholders adopted on September
13,1949; and (c) defendant shall pay to plaintiffs an additional
amount equivalent to 10 per cent of said amount of
P583,813.59 as damages by way of attorney's fees, and to
pay the costs of action.
Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo,
Concepcion, and Reyes, J. B. L., concur.
Reyes, A., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila

rejected the contention that the resolution adopted by the

company is ultra vires and that the obligation it has assumed
is merely that of a guarantor.

EN BANC

Defendant took the present appeal.

G.R. No. L-18062

February 28, 1963

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the
Director of Posts requesting the opening of a post, telegraph
and money order offices at its mining camp at Sta. Cruz,
Zambales, to service its employees and their families that
were living in said camp. Acting on the request, the Director of
Posts wrote in reply stating that if aside from free quarters the
company would provide for all essential equipment and assign
a responsible employee to perform the duties of a postmaster
without compensation from his office until such time as funds
therefor may be available he would agree to put up the offices
requested. The company in turn replied signifying its
willingness to comply with all the requirements outlined in the
letter of the Director of Posts requesting at the same time that
it be furnished with the necessary forms for the early
establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to
the company stating among other things that "In cases where
a post office will be opened under circumstances similar to the
present, it is the policy of this office to have the company
assume direct responsibility for whatever pecuniary loss may
be suffered by the Bureau of Posts by reason of any act of
dishonesty, carelessness or negligence on the part of the
employee of the company who is assigned to take charge of
the post office," thereby suggesting that a resolution be
adopted by the board of directors of the company expressing
conformity to the above condition relative to the responsibility
to be assumed buy it in the event a post office branch is
opened as requested. On September 2, 1949, the company
informed the Director of Posts of the passage by its board of
directors of a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the Company should
accept full responsibility for all cash received by the
Postmaster be complied with, and that a copy of this
resolution be forwarded to the Bureau of Posts." The letter
further states that the company feels that that resolution
fulfills the last condition imposed by the Director of Posts and
that, therefore, it would request that an inspector be sent to
the camp for the purpose of acquainting the postmaster with
the details of the operation of the branch office.
The post office branch was opened at the camp on October
13, 1949 with one Hilario M. Sanchez as postmaster. He is an
employee of the company. On May 11, 1954, the postmaster
went on a three-day leave but never returned. The company
immediately informed the officials of the Manila Post Office
and the provincial auditor of Zambales of Sanchez'
disappearance with the result that the accounts of the
postmaster were checked and a shortage was found in the
amount of P13,867.24.
The several demands made upon the company for the
payment of the shortage in line with the liability it has
assumed having failed, the government commenced the
present action on September 10, 1954 before the Court of
First Instance of Manila seeking to recover the amount of
Pl3,867.24. The company in its answer denied liability for said
amount contending that the resolution of the board of
directors wherein it assumed responsibility for the act of the
postmaster is ultra vires, and in any event its liability under
said resolution is only that of a guarantor who answers only
after the exhaustion of the properties of the principal, aside
from the fact that the loss claimed by the plaintiff is not
supported by the office record.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t
After trial, the court a quo found that, of the amount claimed
by plaintiff totalling P13,867.24, only the sum of P9,515.25
was supported by the evidence, and so it rendered judgment
for the plaintiff only for the amount last mentioned. The court

The contention that the resolution adopted by the company

dated August 31, 1949 is ultra vires in the sense that it has no
authority to act on a matter which may render the company
liable as a guarantor has no factual or legal basis. In the first
place, it should be noted that the opening of a post office
branch at the mining camp of appellant corporation was
undertaken because of a request submitted by it to promote
the convenience and benefit of its employees. The idea did
not come from the government, and the Director of Posts was
prevailed upon to agree to the request only after studying the
necessity for its establishment and after imposing upon the
company certain requirements intended to safeguard and
protect the interest of the government. Thus, after the
company had signified its willingness to comply with the
requirement of the government that it furnish free quarters
and all the essential equipment that may be necessary for the
operation of the office including the assignment of an
employee who will perform the duties of a postmaster, the
Director of Posts agreed to the opening of the post office
stating that "In cases where a post office will be opened under
circumstances similar to the present, it is the policy of this
office to have the company assume direct responsibility for
whatever pecuniary loss may be suffered by the Bureau of
Posts by reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the company who
is assigned to take charge of the post office," and accepting
this condition, the company, thru its board of directors,
adopted forthwith a resolution of the following tenor: "That
the requirement of the Bureau of Posts that the company
should accept full responsibility for all cash received by the
Postmaster, be complied with, and that a copy of this
resolution be forwarded to the Bureau of Posts." On the basis
of the foregoing facts, it is evident that the company cannot
now be heard to complain that it is not liable for the
irregularity committed by its employee upon the technical
plea that the resolution approved by its board of directors is
ultra vires. The least that can be said is that it cannot now go
back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of
directors of appellant company is an ultra vires act cannot
also be entertained it appearing that the same covers a
subject which concerns the benefit, convenience and welfare
of its employees and their families. While as a rule an ultra
vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization
and therefore beyond the powers conferred upon it by law (19
C.J.S., Section 965, p. 419), there are however certain
corporate acts that may be performed outside of the scope of
the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation. Thus, it has
been held that "although not expressly authorized to do so a
corporation may become a surety where the particular
transaction is reasonably necessary or proper to the conduct
of its business,"1 and here it is undisputed that the
establishment of the local post office is a reasonable and
proper adjunct to the conduct of the business of appellant
company. Indeed, such post office is a vital improvement in
the living condition of its employees and laborers who came
to settle in its mining camp which is far removed from the
postal facilities or means of communication accorded to
people living in a city or municipality..
Even assuming arguendo that the resolution in question
constitutes an ultra vires act, the same however is not void for
it was approved not in contravention of law, customs, public
order or public policy. The term ultra vires should be
distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification,
or estoppel, while the latter is void and cannot be validated.2
It being merely voidable, an ultra vires act can be enforced or
validated if there are equitable grounds for taking such action.
Here it is fair that the resolution be upheld at least on the
ground of estoppel. On this point, the authorities are
overwhelming:
The weight of authority in the state courts is to the effect that
a transaction which is merely ultra vires and not malum in se
or malum prohibitum, is, if performed by one party, not void
as between the parties to all intents and purposes, and that
an action may be brought directly on the transaction and
relief had according to its terms. (19 C.J.S., Section 976, p.
432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d, reversing,
D.C., 20 F. Supp. 48)

This rule is based on the consideration that as between

private corporations, one party cannot receive the benefits
which are embraced in total performance of a contract made
with it by another party and then set up the invalidity of the
transaction as a defense." (London & Lancashire Indemnity
Co. of America v. Fairbanks Steam Shovel Co., 147 N.E. 329,
332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty
toward stockholders, and should not be entertained where its
allowance will do greater wrong to innocent parties dealing
with corporation..
The acceptance of benefits arising from the performance by
the other party may give rise to an estoppel precluding
repudiation of the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where
the ultra vires transaction has been executed by the other
party and the corporation has received the benefit of it, the
law interposes an estoppel, and will not permit the validity of
the transaction or contract to be questioned, and this is
especially true where there is nothing in the circumstances to
put the other party to the transaction on notice that the
corporation has exceeded its powers in entering into it and
has in so doing overstepped the line of corporate privileges.
(19 C.J.S., Section 977, pp. 435-437, citing Williams v. Peoples
Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v.
Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its
liability is only that of a guarantor. On this point, we agree
with the following comment of the court a quo: "A mere
reading of the resolution of the Board of Directors dated
August 31, 1949, upon which the plaintiff based its claim
would show that the responsibility of the defendant company
is not just that of a guarantor. Notice that the phraseology and
the terms employed are so clear and sweeping and that the
defendant assumed 'full responsibility for all cash received by
the Postmaster.' Here the responsibility of the defendant is not
just that of a guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No
costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L.,
Barrera, Paredes, Dizon, Regala and Makalintal, JJ. concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their

own behalf and in that all other stockholders of the Balatoc
Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC
MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A.
W. BEAM, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining
Company.
STREET, J.:
This action was originally instituted in the Court of First
Instance of the City of Manila by F. M. Harden, acting in his
own behalf and that of all other stockholders of the Balatoc
Mining Co. who might join in the action and contribute to the
expense of the suit. With the plaintiff Harden two others, J. D.
Highsmith and John C. Hart, subsequently associated
themselves. The defendants are the Benguet Consolidated
Mining Co., the Balatoc Mining Co., H. E. Renz, John W.
Haussermann, and A. W. Beam. The principal purpose of the
original action was to annul a certificate covering 600,000
shares of the stock of the Balatoc Mining Co., which have
been issued to the Benguet Consolidated Mining Co., and to
secure to the Balatoc Mining Co., the restoration of a large
sum of money alleged to have been unlawfully collected by
the Benguet Consolidated Mining Co., with legal interest, after
deduction therefrom of the amount expended by the latter
company under a contract between the two companies,
bearing date of March 9, 1927. The complaint was afterwards
amended so as to include a prayer for the annulment of this
contract. Shortly prior to the institution of this lawsuit, the
Benguet Consolidated Mining Co., transferred to H. E. Renz, as
trustee, the certificate for 600,000 shares of the Balatoc
Mining Co. which constitute the principal subject matter of the
action. This was done apparently to facilitate the splitting up
to the shares in the course of the sale or distribution. To
prevent this the plaintiffs, upon filing their original complaint,
procured a preliminary injunction restraining the defendants,
their agents and servants, from selling, assigning or
transferring the 600,000 shares of the Balatoc Mining Co., or
any part thereof, and from removing said shares from the
Philippine Islands. This explains the connection of Renz with
the case. The other individual defendants are made merely as
officials of the Benguet Consolidated Mining Co. Upon hearing
the cause the trial court dismissed the complaint and
dissolved the preliminary injunction, with costs against the
plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the
financial interests involve are immense. Briefly told these
facts are as follows: The Benguet Consolidated Mining Co. was
organized in June, 1903, as a sociedad anonima in conformity
with the provisions of Spanish law; while the Balatoc Mining
Co. was organized in December 1925, as a corporation, in
conformity with the provisions of the Corporation Law (Act No.
1459). Both entities were organized for the purpose of
engaging in the mining of gold in the Philippine Islands, and
their respective properties are located only a few miles apart
in the subprovince of Benguet. The capital stock of the
Balatoc Mining Co. consists of one million shares of the par
value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the
properties acquired by it were largely undeveloped; and the
original stockholders were unable to supply the means
needed for profitable operation. For this reason, the board of
directors of the corporation ordered a suspension of all work,
effective July 31, 1926. In November of the same year a
general meeting of the company's stockholders appointed a
committee for the purpose of interesting outside capital in the
mine. Under the authority of this resolution the committee
approached A. W. Beam, then president and general manager
of the Benguet Company, to secure the capital necessary to
the development of the Balatoc property. As a result of the
negotiations thus begun, a contract, formally authorized by
the management of both companies, was executed on March
9, 1927, the principal features of which were that the Benguet
Company was to proceed with the development and construct
a milling plant for the Balatoc mine, of a capacity of 100 tons
of ore per day, and with an extraction of at least 85 per cent

of the gold content. The Benguet Company also agreed to

erect an appropriate power plant, with the aerial tramlines
and such other surface buildings as might be needed to
operate the mine. In return for this it was agreed that the
Benguet Company should receive from the treasurer of the
Balatoc Company shares of a par value of P600,000, in
payment for the first P600,000 be thus advanced to it by the
Benguet Company.
The performance of this contract was speedily begun, and by
May 31, 1929, the Benguet Company had spent upon the
development the sum of P1,417,952.15. In compensation for
this work a certificate for six hundred thousand shares of the
stock of the Balatoc Company has been delivered to the
Benguet Company, and the excess value of the work in the
amount of P817,952.15 has been returned to the Benguet
Company in cash. Meanwhile dividends of the Balatoc
Company have been enriching its stockholders, and at the
time of the filing of the complaint the value of its shares had
increased in the market from a nominal valuation to more
than eleven pesos per share. While the Benguet Company was
pouring its million and a half into the Balatoc property, the
arrangements made between the two companies appear to
have been viewed by the plaintiff Harden with complacency,
he being the owner of many thousands of the shares of the
Balatoc Company. But as soon as the success of the
development had become apparent, he began this litigation in
which he has been joined by two others of the eighty
shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that
it is unlawful for the Benguet Company to hold any interest in
a mining corporation and that the contract by which the
interest here in question was acquired must be annulled, with
the consequent obliteration of the certificate issued to the
Benguet Company and the corresponding enrichment of the
shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the
United States, in the attention of the Philippine Commission
was early drawn to the fact that there is no entity in Spanish
law exactly corresponding to the notion of the corporation in
English and American law; and in the Philippine Bill, approved
July 1, 1902, the Congress of the United States inserted
certain provisions, under the head of Franchises, which were
intended to control the lawmaking power in the Philippine
Islands in the matter of granting of franchises, privileges and
concessions. These provisions are found in section 74 and 75
of the Act. The provisions of section 74 have been superseded
by section 28 of the Act of Congress of August 29, 1916, but
in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This
provisions, in its original form, reads as follows: "... it shall be
unlawful for any member of a corporation engaged in
agriculture or mining and for any corporation organized for
any purpose except irrigation to be in any wise interested in
any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus
enacted by Congress, the Philippine Commission entered upon
the enactment of a general law authorizing the creation of
corporations in the Philippine Islands. This rather elaborate
piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the
American corporation into the Philippine Islands as the
standard commercial entity and to hasten the day when the
sociedad anonima of the Spanish law would be obsolete. That
statute is a sort of codification of American corporate law.
For the purposes general description only, it may be stated
that the sociedad anonima is something very much like the
English joint stock company, with features resembling those of
both the partnership is shown in the fact that sociedad, the
generic component of its name in Spanish, is the same word
that is used in that language to designate other forms of
partnership, and in its organization it is constructed along the
same general lines as the ordinary partnership. It is therefore
not surprising that for purposes of loose translation the
expression sociedad anonima has not infrequently the other
hand, the affinity of this entity to the American corporation
has not escaped notice, and the expression sociedad anonima
is now generally translated by the word corporation. But when
the word corporation is used in the sense of sociedad anonima
and close discrimination is necessary, it should be associated
with the Spanish expression sociedad anonima either in a
parenthesis or connected by the word "or". This latter device
was adopted in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission
inserted bodily, in subsection (5) of section 13 of that Act (No.
1459) the words which we have already quoted from section

75 of the Act of Congress of July 1, 1902 (Philippine Bill); and

it is of course obvious that whatever meaning originally
attached to this provision in the Act of Congress, the same
significance should be attached to it in section 13 of our
Corporation Law.
As it was the intention of our lawmakers to stimulate the
introduction of the American Corporation into Philippine law in
the place of the sociedad anonima, it was necessary to make
certain adjustments resulting from the continued coexistence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision
is found making the sociedad anonima subject to the
provisions of the Corporation Law "so far as such provisions
may be applicable", and giving to the sociedades anonimas
previously created in the Islands the option to continue
business as such or to reform and organize under the
provisions of the Corporation Law. Again, in section 191 of the
Corporation Law, the Code of Commerce is repealed in so far
as it relates to sociedades anonimas. The purpose of the
commission in repealing this part of the Code of Commerce
was to compel commercial entities thereafter organized to
incorporate under the Corporation Law, unless they should
prefer to adopt some form or other of the partnership. To this
provision was added another to the effect that existing
sociedades anonimas, which elected to continue their
business as such, instead of reforming and reorganizing under
the Corporation Law, should continue to be governed by the
laws that were in force prior to the passage of this Act "in
relation to their organization and method of transacting
business and to the rights of members thereof as between
themselves, but their relations to the public and public
officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section
75 of the Act Congress of July 1, 1902 (Philippine Bill),
generally prohibiting corporations engaged in mining and
members of such from being interested in any other
corporation engaged in mining, was amended by section 7 of
Act No. 3518 of the Philippine Legislature, approved by
Congress March 1, 1929. The change in the law effected by
this amendment was in the direction of liberalization. Thus,
the inhibition contained in the original provision against
members of a corporation engaged in agriculture or mining
from being interested in other corporations engaged in
agriculture or in mining was so modified as merely to prohibit
any such member from holding more than fifteen per centum
of the outstanding capital stock of another such corporation.
Moreover, the explicit prohibition against the holding by any
corporation (except for irrigation) of an interest in any other
corporation engaged in agriculture or in mining was so
modified as to limit the restriction to corporations organized
for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did
not contain any appropriate clause directly penalizing the act
of a corporation, a member of a corporation , in acquiring an
interest contrary to paragraph (5) of section 13 of the Act. The
Philippine Legislature undertook to remedy this situation in
section 3 of Act No. 2792 of the Philippine Legislature,
approved on February 18, 1919, but this provision was
declared invalid by this court in Government of the Philippine
Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an
adequate title to the Act. Subsequently the Legislature
reenacted substantially the same penal provision in section 21
of Act No. 3518, under a title sufficiently broad to comprehend
the subject matter. This part of Act No. 3518 became effective
upon approval by the Governor-General, on December 3,
1928, and it was therefore in full force when the contract now
in question was made.
This provision was inserted as a new section in the
Corporation Law, forming section 1990 (A) of said Act as it
now stands. Omitting the proviso, which seems not to be
pertinent to the present controversy, said provision reads as
follows:
SEC. 190 (A). Penalties. The violation of any of the
provisions of this Act and its amendments not otherwise
penalized therein, shall be punished by a fine of not more
than five thousand pesos and by imprisonment for not more
than five years, in the discretion of the court. If the violation is
committed by a corporation, the same shall, upon such
violation being proved, be dissolved by quo warranto
proceedings instituted by the Attorney-General or by any
provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that
there are two fundamental questions involved in this
controversy. The first is whether the plaintiffs can maintain an
action based upon the violation of law supposedly committed
by the Benguet Company in this case. The second is whether,

assuming the first question to be answered in the affirmative,

the Benguet Company, which was organized as a sociedad
anonima, is a corporation within the meaning of the language
used by the Congress of the United States, and later by the
Philippine Legislature, prohibiting a mining corporation from
becoming interested in another mining corporation. It is
obvious that, if the first question be answered in the negative,
it will be unnecessary to consider the second question in this
lawsuit.
Upon the first point it is at once obvious that the provision
referred to was adopted by the lawmakers with a sole view to
the public policy that should control in the granting of mining
rights. Furthermore, the penalties imposed in what is now
section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be
enforced only by a criminal prosecution or by an action of quo
warranto. But these proceedings can be maintained only by
the Attorney-General in representation of the Government.
What room then is left for the private action which the
plaintiffs seek to assert in this case? The defendant Benguet
Company has committed no civil wrong against the plaintiffs,
and if a public wrong has been committed, the directors of the
Balatoc Company, and the plaintiff Harden himself, were the
active inducers of the commission of that wrong. The contract,
supposing it to have been unlawful in fact, has been
performed on both sides, by the building of the Balatoc plant
by the Benguet Company and the delivery to the latter of the
certificate of 600,000 shares of the Balatoc Company. There is
no possibility of really undoing what has been done. Nobody
would suggest the demolition of the mill. The Balatoc
Company is secure in the possession of that improvement,
and talk about putting the parties in status quo ante by
restoring the consideration with interest, while the Balatoc
Company remains in possession of what it obtained by the use
of that money, does not quite meet the case. Also, to mulct
the Benguet Company in many millions of dollars in favor of
individuals who have not the slightest equitable right to that
money in a proposition to which no court can give a ready
assent.
The most plausible presentation of the case of the plaintiffs
proceeds on the assumption that only one of the contracting
parties has been guilty of a misdemeanor, namely, the
Benguet Company, and that the other party, the Balatoc
Company, is wholly innocent to participation in that wrong.
The plaintiffs would then have us apply the second paragraph
of article 1305 of the Civil Code which declares that an
innocent party to an illegal contract may recover anything he
may have given, while he is not bound to fulfill any promise
he may have made. But, supposing that the first hurdle can
be safely vaulted, the general remedy supplied in article 1305
of the Civil Code cannot be invoked where an adequate
special remedy is supplied in a special law. It has been so held
by this court in Go Chioco vs. Martinez (45 Phil., 256, 280),
where we refused to apply that article to a case of nullity
arising upon a usurious loan. The reason given for the decision
on this point was that the Usury Act, as amended, contains all
the provisions necessary for the effectuation of its purposes,
with the result that the remedy given in article 1305 of the
Civil Code is unnecessary. Much more is that idea applicable
to the situation now before us, where the special provisions
give ample remedies for the enforcement of the law by action
in the name of the Government, and where no civil wrong has
been done to the party here seeking redress.
The view of the case presented above rest upon
considerations arising upon our own statutes; and it would
seem to be unnecessary to ransack the American decisions
for analogies pertinent to the case. We may observe,
however, that the situation involved is not unlike that which
has frequently arisen in the United States under provisions of
the National Bank Act prohibiting banks organized under that
law from holding real property. It has been uniformly held that
a trust deed or mortgaged conveying property of this kind to a
bank, by way of security, is valid until the transaction is
assailed in a direct proceeding instituted by the Government
against the bank, and the illegality of such tenure supplies no
basis for an action by the former private owner, or his
creditor, to annul the conveyance. (National Bank vs.
Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218
U. S., 281.) Other analogies point in the same direction.
(South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29
Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell
Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77
Hun., 332.)
Most suggestive perhaps of all the cases in Compaia
Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for
the reason that this case arose under a provision of the
Foraker Act, a law analogous to our Philippine Bill. It appears

that the registrar had refused to register two deeds in favor of

the Compaia Azucarera on the ground that the land thereby
conveyed was in excess of the area permitted by law to the
company. The Porto Rican court reversed the ruling of the
registrar and ordered the registration of the deeds, saying:
Thus it may be seen that a corporation limited by the law or
by its charter has until the State acts every power and
capacity that any other individual capable of acquiring lands,
possesses. The corporation may exercise every act of
ownership over such lands; it may sue in ejectment or
unlawful detainer and it may demand specific performance. It
has an absolute title against all the world except the State
after a proper proceeding is begun in a court of law. ... The
Attorney General is the exclusive officer in whom is confided
the right to initiate proceedings for escheat or attack the right
of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of
action against the Benguet Company for the infraction of law
supposed to have been committed, we forego cny discussion
of the further question whether a sociedad anonima created
under Spanish law, such as the Benguet Company, is a
corporation within the meaning of the prohibitory provision
already so many times mentioned. That important question
should, in our opinion, be left until it is raised in an action
brought by the Government.
The judgment which is the subject of his appeal will therefore
be affirmed, and it is so ordered, with costs against the
appellants.
Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos,
Hull, Vickers, Imperial and Butte, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and
ALEJANDRO TE, respondents.
De Jesus & Associates for petitioner.
Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by
petitioner Prime White Cement Corporation seeking the
reversal of the decision * of the then Intermediate Appellate
Court, the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, the judgment appealed
from is hereby affirmed in toto. 1
The facts, as found by the trial court and as adopted by the
respondent Court are hereby quoted, to wit:
On or about the 16th day of July, 1969, plaintiff and defendant
corporation thru its President, Mr. Zosimo Falcon and Justo C.
Trazo, as Chairman of the Board, entered into a dealership
agreement (Exhibit A) whereby said plaintiff was obligated to
act as the exclusive dealer and/or distributor of the said
defendant corporation of its cement products in the entire
Mindanao area for a term of five (5) years and proving (sic)
among others that:
a.
The corporation shall, commencing September,
1970, sell to and supply the plaintiff, as dealer with 20,000
bags (94 lbs/bag) of white cement per month;
b.
The plaintiff shall pay the defendant corporation
P9.70, Philippine Currency, per bag of white cement, FOB
Davao and Cagayan de Oro ports;
c.
The plaintiff shall, every time the defendant
corporation is ready to deliver the good, open with any bank
or banking institution a confirmed, unconditional, and
irrevocable letter of credit in favor of the corporation and that
upon certification by the boat captain on the bill of lading that
the goods have been loaded on board the vessel bound for
Davao the said bank or banking institution shall release the
corresponding amount as payment of the goods so shipped.
Right after the plaintiff entered into the aforesaid dealership
agreement, he placed an advertisement in a national,
circulating newspaper the fact of his being the exclusive
dealer of the defendant corporation's white cement products
in Mindanao area, more particularly, in the Manila Chronicle
dated August 16, 1969 (Exhibits R and R-1) and was even
congratulated by his business associates, so much so, he was
asked by some of his businessmen friends and close
associates if they can be his
sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff
sometime in the months of September, October, and
December, 1969, entered into a written agreement with
several hardware stores dealing in buying and selling white
cement in the Cities of Davao and Cagayan de Oro which
would thus enable him to sell his allocation of 20,000 bags
regular supply of the said commodity, by September, 1970
(Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the
plaintiff was assured by his supposed buyer that his allocation
of 20,000 bags of white cement can be disposed of, he
informed the defendant corporation in his letter dated August
18, 1970 that he is making the necessary preparation for the
opening of the requisite letter of credit to cover the price of
the due initial delivery for the month of September, 1970
(Exhibit B), looking forward to the defendant corporation's
duty to comply with the dealership agreement. In reply to the
aforesaid letter of the plaintiff, the defendant corporation thru
its corporate secretary, replied that the board of directors of
the said defendant decided to impose the following
conditions:

a.
Delivery of white cement shall commence at the end
of November, 1970;
b.
Only 8,000 bags of white cement per month for only
a period of three (3) months will be delivered;
c.
bag;

The price of white cement was priced at P13.30 per

d.
The price of white cement is subject to readjustment
unilaterally on the part of the defendant;
e.
The place of delivery of white cement shall be
Austurias (sic);
f.
The letter of credit may be opened only with the
Prudential Bank, Makati Branch;
g.
Payment of white cement shall be made in advance
and which payment shall be used by the defendant as
guaranty in the opening of a foreign letter of credit to cover
costs and expenses in the procurement of materials in the
manufacture of white cement. (Exhibit C).
xxx

xxx

xxx

Several demands to comply with the dealership agreement

(Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to
the defendant, however, defendant refused to comply with
the same, and plaintiff by force of circumstances was
constrained to cancel his agreement for the supply of white
cement with third parties, which were concluded in
anticipation of, and pursuant to the said dealership
agreement.
Notwithstanding that the dealership agreement between the
plaintiff and defendant was in force and subsisting, the
defendant corporation, in violation of, and with evident
intention not to be bound by the terms and conditions thereof,
entered into an exclusive dealership agreement with a certain
Napoleon Co for the marketing of white cement in Mindanao
(Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp.
86-90). 2
After trial, the trial court adjudged the corporation liable to
Alejandro Te in the amount of P3,302,400.00 as actual
damages, P100,000.00 as moral damages, and P10,000.00 as
and for attorney's fees and costs. The appellate court affirmed
the said decision mainly on the following basis, and We quote:
There is no dispute that when Zosimo R. Falcon and Justo B.
Trazo signed the dealership agreement Exhibit "A", they were
the President and Chairman of the Board, respectively, of
defendant-appellant corporation. Neither is the genuineness
of the said agreement contested. As a matter of fact, it
appears on the face of the contract itself that both officers
were duly authorized to enter into the said agreement and
signed the same for and in behalf of the corporation. When
they, therefore, entered into the said transaction they created
the impression that they were duly clothed with the authority
to do so. It cannot now be said that the disputed agreement
which possesses all the essential requisites of a valid contract
was never intended to bind the corporation as this avoidance
is barred by the principle of estoppel. 3
In this petition for review, petitioner Prime White Cement
Corporation made the following assignment of errors. 4
I
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM
THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD
ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION
ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY
OF DIRECTORS AND OFFICERS OF THE CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE
CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL
CODE.

IV
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL
DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS
STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE
DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE
APPELLATE COURT HAS CLEARLY DEPARTED FROM THE
ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.
There is only one legal issue to be resolved by this Court:
whether or not the "dealership agreement" referred by the
President and Chairman of the Board of petitioner corporation
is a valid and enforceable contract. We do not agree with the
conclusion of the respondent Court that it is.
Under the Corporation Law, which was then in force at the
time this case arose, 5 as well as under the present
Corporation Code, all corporate powers shall be exercised by
the Board of Directors, except as otherwise provided by law. 6
Although it cannot completely abdicate its power and
responsibility to act for the juridical entity, the Board may
expressly delegate specific powers to its President or any of
its officers. In the absence of such express delegation, a
contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should
ratify the same expressly or impliedly. Implied ratification may
take various forms like silence or acquiescence; by acts
showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom. 7
Furthermore, even in the absence of express or implied
authority by ratification, the President as such may, as a
general rule, bind the corporation by a contract in the
ordinary course of business, provided the same is reasonable
under the circumstances. 8 These rules are basic, but are all
general and thus quite flexible. They apply where the
President or other officer, purportedly acting for the
corporation, is dealing with a third person, i. e., a person
outside the corporation.
The situation is quite different where a director or officer is
dealing with his own corporation. In the instant case
respondent Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the
corporation as well. He was what is often referred to as a "selfdealing" director.
A director of a corporation holds a position of trust and as
such, he owes a duty of loyalty to his corporation. 9 In case
his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders." 10 In the case of
Gokongwei v. Securities and Exchange Commission, this Court
quoted with favor from Pepper v. Litton, 11 thus:
. . . He cannot by the intervention of a corporate entity violate
the ancient precept against serving two masters. . . . He
cannot utilize his inside information and his strategic position
for his own preferment. He cannot violate rules of fair play by
doing indirectly through the corporation what he could not do
directly. He cannot use his power for his personal advantage
and to the detriment of the stockholders and creditors no
matter how absolute in terms that power may be and no
matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable
limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the fiduciary to
the exclusion or detriment of the cestuis. . . . .
On the other hand, a director's contract with his corporation is
not in all instances void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the
stockholders provided a full disclosure of his adverse interest
is made. Section 32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the
corporation. A contract of the corporation with one or more
of its directors or trustees or officers is voidable, at the option
of such corporation, unless all the following conditions are
present:

1.
That the presence of such director or trustee in the
board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2.
That the vote of such director or trustee was not
necessary for the approval of the contract;
3.
That the contract is fair and reasonable under the
circumstances; and
4.
That in the case of an officer, the contract with the
officer has been previously authorized by the Board of
Directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract with
a director or trustee, such contract may be ratified by the vote
of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.
Although the old Corporation Law which governs the instant
case did not contain a similar provision, yet the cited provision
substantially incorporates well-settled principles in corporate
law. 12
Granting arguendo that the "dealership agreement" involved
here would be valid and enforceable if entered into with a
person other than a director or officer of the corporation, the
fact that the other party to the contract was a Director and
Auditor of the petitioner corporation changes the whole
situation. First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement" entered into
in July, 1969, was to sell and supply to respondent Te 20,000
bags of white cement per month, for five years starting
September, 1970, at the fixed price of P9.70 per bag.
Respondent Te is a businessman himself and must have
known, or at least must be presumed to know, that at that
time, prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. At the
time of the contract, petitioner corporation had not even
commenced the manufacture of white cement, the reason
why delivery was not to begin until 14 months later. He must
have known that within that period of six years, there would
be a considerable rise in the price of white cement. In fact,
respondent Te's own Memorandum shows that in September,
1970, the price per bag was P14.50, and by the middle of
1975, it was already P37.50 per bag. Despite this, no provision
was made in the "dealership agreement" to allow for an
increase in price mutually acceptable to the parties. Instead,
the price was pegged at P9.70 per bag for the whole five
years of the contract. Fairness on his part as a director of the
corporation from whom he was to buy the cement, would
require such a provision. In fact, this unfairness in the contract
is also a basis which renders a contract entered into by the
President, without authority from the Board of Directors, void
or voidable, although it may have been in the ordinary course
of business. We believe that the fixed price of P9.70 per bag
for a period of five years was not fair and reasonable.
Respondent Te, himself, when he subsequently entered into
contracts to resell the cement to his "new dealers" Henry Wee
13 and Gaudencio Galang 14 stipulated as follows:
The price of white cement shall be mutually determined by us
but in no case shall the same be less than P14.00 per bag (94
lbs).
The contract with Henry Wee was on September 15, 1969,
and that with Gaudencio Galang, on October 13, 1967. A
similar contract with Prudencio Lim was made on December
29, 1969. 15 All of these contracts were entered into soon
after his "dealership agreement" with petitioner corporation,
and in each one of them he protected himself from any
increase in the market price of white cement. Yet, except for
the contract with Henry Wee, the contracts were for only two
years from October, 1970. Why did he not protect the
corporation in the same manner when he entered into the
"dealership agreement"? For that matter, why did the
President and the Chairman of the Board not do so either? As
director, specially since he was the other party in interest,
respondent Te's bounden duty was to act in such manner as
not to unduly prejudice the corporation. In the light of the
circumstances of this case, it is to Us quite clear that he was
guilty of disloyalty to the corporation; he was attempting in
effect, to enrich himself at the expense of the corporation.
There is no showing that the stockholders ratified the
"dealership agreement" or that they were fully aware of its

provisions. The contract was therefore not valid and this Court
cannot allow him to reap the fruits of his disloyalty.
As a result of this action which has been proven to be without
legal basis, petitioner corporation's reputation and goodwill
have been prejudiced. However, there can be no award for
moral damages under Article 2217 and succeeding articles on
Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of
a corporation.
In view of the foregoing, the Decision and Resolution of the
Intermediate Appellate Court dated March 30, 1984 and
August 6, 1984, respectively, are hereby SET ASIDE. Private
respondent Alejandro Te is hereby ordered to pay petitioner
corporation the sum of P20,000.00 for attorney's fees, plus
the cost of suit and expenses of litigation.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

SECOND DIVISION
[G.R. No. 142435. April 30, 2003]
ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC
EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs of
EUGENIO D. TRINIDAD, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the
Decision[1] dated October 21, 1999 of the Court of Appeals in
CA-G.R. CV No. 41536 which dismissed herein petitioners
appeal from the Decision[2] dated February 10, 1993 of the
Regional Trial Court (RTC) of Quezon City, Branch 84, in Civil
Case No. Q-89-4152. The trial court had dismissed petitioners
complaint for annulment of real estate mortgage and the
extra-judicial foreclosure thereof. Likewise brought for our
review is the Resolution[3] dated February 23, 2000 of the
Court of Appeals which denied petitioners motion for
reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos
Lipat, owned Belas Export Trading (BET), a single
proprietorship with principal office at No. 814 Aurora
Boulevard, Cubao, Quezon City. BET was engaged in the
manufacture of garments for domestic and foreign
consumption. The Lipats also owned the Mystical Fashions in
the United States, which sells goods imported from the
Philippines through BET. Mrs. Lipat designated her daughter,
Teresita B. Lipat, to manage BET in the Philippines while she
was managing Mystical Fashions in the United States.
In order to facilitate the convenient operation of BET, Estelita
Lipat executed on December 14, 1978, a special power of
attorney appointing Teresita Lipat as her attorney-in-fact to
obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She
likewise authorized Teresita to execute mortgage contracts on
properties owned or co-owned by her as security for the
obligations to be extended by Pacific Bank including any
extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special
power of attorney, was able to secure for and in behalf of her
mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured
by BET and exported to Mystical Fashions in the United States.
As security therefor, the Lipat spouses, as represented by
Teresita, executed a Real Estate Mortgage over their property
located at No. 814 Aurora Blvd., Cubao, Quezon City. Said
property was likewise made to secure other additional or new
loans, discounting lines, overdrafts and credit
accommodations, of whatever amount, which the Mortgagor
and/or Debtor may subsequently obtain from the Mortgagee
as well as any renewal or extension by the Mortgagor and/or
Debtor of the whole or part of said original, additional or new
loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other
obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly, principal or
secondary, as appears in the accounts, books and records of
the Mortgagee.[4]
On September 5, 1979, BET was incorporated into a family
corporation named Belas Export Corporation (BEC) in order to
facilitate the management of the business. BEC was engaged
in the business of manufacturing and exportation of all kinds
of garments of whatever kind and description[5] and utilized
the same machineries and equipment previously used by BET.
Its incorporators and directors included the Lipat spouses who
owned a combined 300 shares out of the 420 shares
subscribed, Teresita Lipat who owned 20 shares, and other
close relatives and friends of the Lipats.[6] Estelita Lipat was
named president of BEC, while Teresita became the vicepresident and general manager.
Eventually, the loan was later restructured in the name of BEC
and subsequent loans were obtained by BEC with the
corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by
Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc.,
upon the request of BEC after BEC executed the
corresponding trust receipt therefor. Export bills were also
executed in favor of Pacific Bank for additional finances. These
transactions were all secured by the real estate mortgage
over the Lipats property.
The promissory notes, export bills, and trust receipt
eventually became due and demandable. Unfortunately, BEC

defaulted in its payments. After receipt of Pacific Banks

demand letters, Estelita Lipat went to the office of the banks
liquidator and asked for additional time to enable her to
personally settle BECs obligations. The bank acceded to her
request but Estelita failed to fulfill her promise.
Consequently, the real estate mortgage was foreclosed and
after compliance with the requirements of the law the
mortgaged property was sold at public auction. On January 31,
1989, a certificate of sale was issued to respondent Eugenio
D. Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the
Quezon City RTC a complaint for annulment of the real estate
mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D.
Trinidad. The complaint, which was docketed as Civil Case No.
Q-89-4152, alleged, among others, that the promissory notes,
trust receipt, and export bills were all ultra vires acts of
Teresita as they were executed without the requisite board
resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on
BEC, the same were the corporations sole obligation, it having
a personality distinct and separate from spouses Lipat. It was
likewise pointed out that Teresitas authority to secure a loan
from Pacific Bank was specifically limited to Mrs. Lipats sole
use and benefit and that the real estate mortgage was
executed to secure the Lipats and BETs P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged
in common that petitioners Lipat cannot evade payments of
the value of the promissory notes, trust receipt, and export
bills with their property because they and the BEC are one
and the same, the latter being a family corporation.
Respondent Trinidad further claimed that he was a buyer in
good faith and for value and that petitioners are estopped
from denying BECs existence after holding themselves out as
a corporation.
After trial on the merits, the RTC dismissed the complaint,
thus:
WHEREFORE, this Court holds that in view of the facts
contained in the record, the complaint filed in this case must
be, as is hereby, dismissed. Plaintiffs however has five (5)
months and seventeen (17) days reckoned from the finality of
this decision within which to exercise their right of
redemption. The writ of injunction issued is automatically
dissolved if no redemption is effected within that period.
The counterclaims and cross-claim are likewise dismissed for
lack of legal and factual basis.
No costs.
IT IS SO ORDERED.[7]
The trial court ruled that there was convincing and conclusive
evidence proving that BEC was a family corporation of the
Lipats. As such, it was a mere extension of petitioners
personality and business and a mere alter ego or business
conduit of the Lipats established for their own benefit. Hence,
to allow petitioners to invoke the theory of separate corporate
personality would sanction its use as a shield to further an
end subversive of justice.[8] Thus, the trial court pierced the
veil of corporate fiction and held that Belas Export Corporation
and petitioners (Lipats) are one and the same. Pacific Bank
had transacted business with both BET and BEC on the
supposition that both are one and the same. Hence, the Lipats
were estopped from disclaiming any obligations on the theory
of separate personality of corporations, which is contrary to
principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of
Appeals in CA-G.R. CV No. 41536. Said appeal, however, was
dismissed by the appellate court for lack of merit. The Court
of Appeals found that there was ample evidence on record to
support the application of the doctrine of piercing the veil of
corporate fiction. In affirming the findings of the RTC, the
appellate court noted that Mrs. Lipat had full control over the
activities of the corporation and used the same to further her
business interests.[9] In fact, she had benefited from the
loans obtained by the corporation to finance her business. It
also found unnecessary a board resolution authorizing Teresita
Lipat to secure loans from Pacific Bank on behalf of BEC
because the corporations by-laws allowed such conduct even
without a board resolution. Finally, the Court of Appeals ruled
that the mortgage property was not only liable for the original
loan of P583,854.00 but likewise for the value of the
promissory notes, trust receipt, and export bills as the
mortgage contract equally applies to additional or new loans,

discounting lines, overdrafts, and credit accommodations

which petitioners subsequently obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was
denied by the appellate court in its Resolution of February 23,
2000.[10]
Hence, this petition, with petitioners submitting that the court
a quo erred
1) .IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL
OF CORPORATE FICTION APPLIES IN THIS CASE.
2) .IN HOLDING THAT PETITIONERS PROPERTY CAN BE HELD
LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR
THE AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL VALUE
OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS
OF BELAS EXPORT CORPORATION.
3) .IN HOLDING THAT THE IMPOSITION OF 15% ATTORNEYS
FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS
COURTS JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST
TIME IN THIS APPEAL.
4) .IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY
THE DISPUTED PROMISSORY NOTES, THE DOLLAR
ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE
EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.
5) .IN DENYING PETITIONERS MOTION FOR RECONSIDERATION
AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION
IS AN UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER
WHICH CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE TO
APPELLANTS.[11]
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate
fiction is applicable in this case;
2. Whether or not petitioners' property under the real estate
mortgage is liable not only for the amount of P583,854.00 but
also for the value of the promissory notes, trust receipt, and
export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15%
attorneys fees stipulated in the deed of real estate mortgage.
On the first issue, petitioners contend that both the appellate
and trial courts erred in holding them liable for the obligations
incurred by BEC through the application of the doctrine of
piercing the veil of corporate fiction absent any clear showing
of fraud on their part.
Respondents counter that there is clear and convincing
evidence to show fraud on part of petitioners given the
findings of the trial court, as affirmed by the Court of Appeals,
that BEC was organized as a business conduit for the benefit
of petitioners.
Petitioners contentions fail to persuade this Court. A careful
reading of the judgment of the RTC and the resolution of the
appellate court show that in finding petitioners mortgaged
property liable for the obligations of BEC, both courts below
relied upon the alter ego doctrine or instrumentality rule,
rather than fraud in piercing the veil of corporate fiction.
When the corporation is the mere alter ego or business
conduit of a person, the separate personality of the
corporation may be disregarded.[12] This is commonly
referred to as the instrumentality rule or the alter ego
doctrine, which the courts have applied in disregarding the
separate juridical personality of corporations. As held in one
case,
Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be disregarded.
The control necessary to invoke the rule is not majority or
even complete stock control but such domination of finances,
policies and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own, and is
but a conduit for its principal. xxx[13]
We find that the evidence on record demolishes, rather than
buttresses, petitioners contention that BET and BEC are
separate business entities. Note that Estelita Lipat admitted
that she and her husband, Alfredo, were the owners of
BET[14] and were two of the incorporators and majority
stockholders of BEC.[15] It is also undisputed that Estelita
Lipat executed a special power of attorney in favor of her

daughter, Teresita, to obtain loans and credit lines from Pacific

Bank on her behalf.[16] Incidentally, Teresita was designated
as executive-vice president and general manager of both BET
and BEC, respectively.[17] We note further that: (1) Estelita
and Alfredo Lipat are the owners and majority shareholders of
BET and BEC, respectively;[18] (2) both firms were managed
by their daughter, Teresita;[19] (3) both firms were engaged in
the garment business, supplying products to Mystical Fashion,
a U.S. firm established by Estelita Lipat; (4) both firms held
office in the same building owned by the Lipats;[20] (5) BEC is
a family corporation with the Lipats as its majority
stockholders; (6) the business operations of the BEC were so
merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were
held by Estelita Lipat and the corporation itself had no visible
assets; (8) the board of directors of BEC was composed of the
Burgos and Lipat family members;[21] (9) Estelita had full
control over the activities of and decided business matters of
the corporation;[22] and that (10) Estelita Lipat had benefited
from the loans secured from Pacific Bank to finance her
business abroad[23] and from the export bills secured by BEC
for the account of Mystical Fashion.[24] It could not have been
coincidental that BET and BEC are so intertwined with each
other in terms of ownership, business purpose, and
management. Apparently, BET and BEC are one and the same
and the latter is a conduit of and merely succeeded the
former. Petitioners attempt to isolate themselves from and
hide behind the corporate personality of BEC so as to evade
their liabilities to Pacific Bank is precisely what the classical
doctrine of piercing the veil of corporate entity seeks to
prevent and remedy. In our view, BEC is a mere continuation
and successor of BET, and petitioners cannot evade their
obligations in the mortgage contract secured under the name
of BEC on the pretext that it was signed for the benefit and
under the name of BET. We are thus constrained to rule that
the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their mortgaged
property should not be made liable for the subsequent credit
lines and loans incurred by BEC because, first, it was not
covered by the mortgage contract of BET which only covered
the loan of P583,854.00 and which allegedly had already been
paid; and, second, it was secured by Teresita Lipat without any
authorization or board resolution of BEC.
We find petitioners contention untenable. As found by the
Court of Appeals, the mortgaged property is not limited to
answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats property can be held
liable under the real estate mortgage is not limited to
P583,854.00. It can be held liable for the value of the
promissory notes, trust receipt and export bills as well. For the
mortgage was executed not only for the purpose of securing
the Belas Export Tradings original loan of P583,854.00, but
also for other additional or new loans, discounting lines,
overdrafts and credit accommodations, of whatever amount,
which the Mortgagor and/or Debtor may subsequently obtain
from the mortgagee as well as any renewal or extension by
the Mortgagor and/or Debtor of the whole or part of said
original, additional or new loans, discounting lines, overdrafts
and other credit accommodations, including interest and
expenses or other obligations of the Mortgagor and/or Debtor
owing to the Mortgagee, whether directly, or indirectly
principal or secondary, as appears in the accounts, books and
records of the mortgagee.[25]
As a general rule, findings of fact of the Court of Appeals are
final and conclusive, and cannot be reviewed on appeal by the
Supreme Court, provided they are borne out by the record or
based on substantial evidence.[26] As noted earlier, BEC
merely succeeded BET as petitioners alter ego; hence,
petitioners mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.
Further, petitioners contention that the original loan had
already been paid, hence, the mortgaged property should not
be made liable to the loans of BEC, is unsupported by any
substantial evidence other than Estelita Lipats self-serving
testimony. Two disputable presumptions under the rules on
evidence weigh against petitioners, namely: (a) that a person
takes ordinary care of his concerns;[27] and (b) that things
have happened according to the ordinary course of nature and
the ordinary habits of life.[28] Here, if the original loan had
indeed been paid, then logically, petitioners would have asked
from Pacific Bank for the required documents evidencing
receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the
cancellation of the mortgage in the ordinary course of things.
However, the records are bereft of any evidence contradicting
or overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property

should not bind the loans and credit lines obtained by BEC as
they were secured without any proper authorization or board
resolution. They also blame the bank for its laxity and
complacency in not requiring a board resolution as a requisite
for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a
board resolution since per admissions by both petitioner
Estelita Lipat and Alice Burgos, petitioners rebuttal witness, no
business or stockholders meetings were conducted nor were
there election of officers held since its incorporation. In fact,
not a single board resolution was passed by the corporate
board[29] and it was Estelita Lipat and/or Teresita Lipat who
decided business matters.[30]
Secondly, the principle of estoppel precludes petitioners from
denying the validity of the transactions entered into by
Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of
petitioner Estelita Lipat and both BET and BEC. While the
power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is
lodged in its board of directors, subject to the articles of
incorporation, by-laws, or relevant provisions of law, yet, just
as a natural person may authorize another to do certain acts
for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers,
committees, or agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate
by-laws, or authorization from the board, either expressly or
impliedly by habit, custom, or acquiescence in the general
course of business.[31] Apparent authority, is derived not
merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds
out an officer or agent as having the power to act or, in other
words, the apparent authority to act in general, with which it
clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers.
[32]
In this case, Teresita Lipat had dealt with Pacific Bank on the
mortgage contract by virtue of a special power of attorney
executed by Estelita Lipat. Recall that Teresita Lipat acted as
the manager of both BEC and BET and had been deciding
business matters in the absence of Estelita Lipat. Further, the
export bills secured by BEC were for the benefit of Mystical
Fashion owned by Estelita Lipat.[33] Hence, Pacific Bank
cannot be faulted for relying on the same authority granted to
Teresita Lipat by Estelita Lipat by virtue of a special power of
attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the
agents authority.[34]
We find no necessity to extensively deal with the liability of
Alfredo Lipat for the subsequent credit lines of BEC. Suffice it
to state that Alfredo Lipat never disputed the validity of the
real estate mortgage of the original loan; hence, he cannot
now dispute the subsequent loans obtained using the same
mortgage contract since it is, by its very terms, a continuing
mortgage contract.
On the third and final issue, petitioners assail the decision of
the Court of Appeals for not taking cognizance of the issue on
attorneys fees on the ground that it was raised for the first
time on appeal. We find the conclusion of the Court of Appeals
to be in accord with settled jurisprudence. Basic is the rule
that matters not raised in the complaint cannot be raised for
the first time on appeal.[35] A close perusal of the complaint
yields no allegations disputing the attorneys fees imposed
under the real estate mortgage and petitioners cannot now
allege that they have impliedly disputed the same when they
sought the annulment of the contract.
In sum, we find no reversible error of law committed by the
Court of Appeals in rendering the decision and resolution
herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated
October 21, 1999 and the Resolution dated February 23, 2000
of the Court of Appeals in CA-G.R. CV No. 41536 are
AFFIRMED. Costs against petitioners.
SO ORDERED.

Bellosillo, (Chairman), Austria-Martinez, and Callejo, Sr., JJ.,

concur.

FIRST DIVISION
[G.R. No. 74336. April 7, 1997]

and to the exclusion of defendant Intertrade and Marketing

Co. Inc.;

J. ANTONIO AGUENZA, petitioner, vs. METROPOLITAN BANK &

TRUST CO., VITALIADO P. ARRIETA, LILIA PEREZ, PATRICIO
PEREZ and THE INTERMEDIATE APPELLATE COURT,
respondents.
DECISION

2)
Ordering defendants Vitaliado P. Arrieta
and Lilia P. Perez to pay, jointly and severally, the plaintiff the
sum of P1,062,898.92, due as of September 15, 1982, plus
interest, fees and penalties due from that date pursuant to
the stipulations in the promissory note until the whole
obligations shall have been paid and finally settled;

HERMOSISIMA, JR., J.:

Before us is a petition for review on certiorari seeking the
reversal of the Decision[1] of the Intermediate Appellate Court
(now the Court of Appeals)[2] finding petitioner J. Antonio
Aguenza liable under a continuing surety agreement to pay
private respondent Metropolitan Bank & Trust Company
(hereafter, Metrobank) a loan jointly obtained by the General
Manager and a bookkeeper of Intertrade, a corporation of
which petitioner is President and in whose behalf petitioner
had, in the past, obtained credit lines.
The following facts are not disputed:
On February 28, 1977, the Board of Directors of Intertrade,
through a Board Resolution, authorized and empowered
petitioner and private respondent Vitaliado Arrieta,
Intertrade's President and Executive Vice-President,
respectively, to jointly apply for and open credit lines with
private respondent Metrobank. Pursuant to such authority,
petitioner and private respondent Arrieta executed several
trust receipts from May to June, 1977, the aggregate value of
which amounted to P562,443.46, with Intertrade as the
entrustee and private respondent Metrobank as the entruster.
On March 14, 1977, petitioner and private respondent Arrieta
executed a Continuing Suretyship Agreement whereby both
bound themselves jointly and severally with Intertrade to pay
private respondent Metrobank whatever obligation Intertrade
incurs, but not exceeding the amount of P750,000.00.
In this connection, private respondent Metrobank's Debit
Memo to Intertrade dated March 22, 1978 showed full
settlement of the letters of credit covered by said trust
receipts in the total amount of P562,443.46.
On March 21, 1978, private respondents Arrieta and Lilia P.
Perez, a bookkeeper in the employ of Intertrade, obtained a
P500,000.00 loan from private respondent Metrobank. Both
executed a Promissory Note in favor of said bank in the
amount of P500,000.00. Under said note, private respondents
Arrieta and Perez promised to pay said amount, jointly and
severally, in twenty five (25) equal installments of P20,000.00
each starting on April 20, 1979 with interest of 18.704% per
annum, and in case of default, a further 8% per annum.
Private respondents Arrieta and Perez defaulted in the
payment of several installments, thus resulting in the entire
obligation becoming due and demandable. In 1979, private
respondent Metrobank instituted suit against Intertrade,
Vitaliado Arrieta, Lilia Perez and her husband, Patricio Perez,
to collect not only the unpaid principal obligation, but also
interests, fees and penalties, exemplary damages, as well as
attorney's fees and costs of suit.
More than a year after private respondent Metrobank filed its
original complaint, it filed an Amended Complaint dated
August 30, 1980 for the sole purpose of impleading petitioner
as liable for the loan made by private respondents Arrieta and
Perez on March 21, 1978, notwithstanding the fact that such
liability is being claimed on account of a Continuing
Suretyship Agreement dated March 14, 1977 executed by
petitioner and private respondent Arrieta specifically to
guarantee the credit line applied for by and granted to,
Intertrade, through petitioner and private respondent Arrieta
who were specially given authority by Intertrade on February
28, 1977 to open credit lines with private respondent
Metrobank. The obligations incurred by Intertrade under such
credit lines were completely paid as evidenced by private
respondent Metrobank's debit memo in the full amount of
P562,443.46.
After hearing on the merits, the trial court rendered its
decision absolving petitioner from liability and dismissing
private respondent Metrobank's complaint against him, the
dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered as follows:
1) Declaring that the Promissory Note dated March 21, 1978,
marked as Exhibit A, is the responsibility only of defendant
Vitaliado P. Arrieta and Lilia P. Perez, in their personal capacity

3) Ordering defendants Vitaliado P. Arrieta and Lilia Perez to

pay, jointly and severally, the plaintiff the sum of P44,000.00
by way of attorney's fees and other litigation expenses, albeit
there is no award for exemplary damages;
4) Declaring defendant Patricio Perez, as conjugal partner of
defendant Lilia Perez, as jointly and severally liable with her
for what the latter is ordered to pay per this Decision;
5) Dismissing this case insofar as defendants Intertrade and
Marketing Co., Inc. and J. Antonio Aguenza are concerned,
although their respective counterclaims against the plaintiff
are also ordered dismissed.
Costs of suit shall be paid, jointly and severally, by defendant
Vitaliado Arrieta and Lilia Perez.
SO ORDERED."[3]
Private respondents Arrieta and spouses Perez appealed the
foregoing decision to the respondent Court of Appeals.
On February 11, 1986, respondent appellate court
promulgated the herein assailed decision, the dispositive
portion of which reads:
"WHEREFORE, the appealed decision is SET ASIDE and
another one entered ordering Intertrade & Marketing Co., Inc.,
and J. Antonio Aguenza, jointly and severally:
1) to pay the Bank the principal of P440,000.00 plus its
interest of 18.704% per annum computed from April 15, 1979
until full payment;
2)
to pay the Bank the sum equivalent to 8%
of P440,000.00 as penalty, computed from July 19, 1978 until
full payment;
3) to pay the Bank the sum of P15,000.00 as attorney's fees.
The complaint is dismissed as against Lilia Perez, Patricio
Perez and Vitaliado P. Arrieta who are absolved from liability.
All counterclaims are dismissed.
Costs against Intertrade and Aguenza, jointly and severally.
SO ORDERED."
In setting aside the decision of the trial court, respondent
Court of Appeals ratiocinated such reversal in this wise:
"No dispute exists as to the promissory note and the
suretyship agreement. The controversy centers on whether
the note was a corporate undertaking and whether the
suretyship agreement covered the obligation in the note.
As far as Intertrade is concerned, it seems clear from its
answer that the loan evidenced by the note was a corporate
liability. Paragraph 1.3 of the answer admits 'x x x defendant's
obtention of the loan from the plaintiff x x x'; the affirmative
defenses admit default, and invoking the defense of usury,
plead adjustment of excessive interest which Intertrade
refused to make.
On the basis of this admission, it is no longer in point to
discuss, as the appealed decision does, the question of the
capacity in which Arrieta and Perez signed the promissory
note, Intertrade's admission of its corporate liability being
admission also that the signatories signed the note in a
representative capacity. The Bank itself gave corroboration
with its insistence on Intertrade's liability under the note. x x x
The stated purpose of the note is 'operating capital.' It cannot
be contended that the words 'operating capital' refer to the
capital requirements of Perez and Arrieta. In the first place, it
was not shown that they were in business for themselves.
Besides, Perez was only a bookkeeper of Intertrade with a
salary of P800.00 a month x x x Their combined resources
would not have been sufficient to justify a business loan of the
note's magnitude. From these follows the only logical

conclusion: that Arrieta and the Perez spouses are not liable
on the note.
The surety agreement presents a different problem.
There is no question that Aguenza signed the agreement x x x
Its second paragraph shows, typewritten in bold capitals, that
the agreement was executed 'for and in consideration of any
existing indebtedness to the Bank of INTERTRADE &
MARKETING COMPANY, INC.' Nowhere in its entire text is it
shown that its execution was for the benefit of Perez or
Arrieta.
Aguenza feigns ignorance of the promissory note and claims
his knowledge of it came only when he received summons.
This is difficult to believe. As Intertrade's first letter to the
Bank x x x shows, the Board of Directors and principal
stockholders met to discuss the obligation. Aguenza was at
the time president of Intertrade and acting chairman of its
board x x x.
Aguenza also argues that the suretyship was executed to
enable Intertrade to avail of letters of credit to finance
importations, which had all been paid in full, and therefore the
agreement was thereby terminated. Again, the agreement
shows up the fallacy of this argument. The document is boldly
denominated 'CONTINUING SURETYSHIP,' and paragraph VI
thereof stipulates it to be a continuing one, 'to remain in force
until written notice shall have been received by the Bank that
it has been revoked by the surety x x x' In other words, the
option to cancel, in writing, was given to the sureties; the
evidence does not show any written notice of such
cancellation. x x x
And, the argument that the agreement was executed as
security for letters of credit that had already been paid is in
itself confirmation that the suretyship was meant to benefit
Intertrade. The trust receipts x x x and the bills of exchange x
x x are all in the name of Intertrade.
The suretyship is both retrospective and prospective in its
operation. Its wording covers all obligations of Intertrade
existing as of its date as well as those that may exist
thereafter. Hence, its coverage extends to the promissory
note as well."[4]
Understandably, petitioner lost no time in bringing this case
before us via a petition for review on certiorari on the
following grounds:
"THE RESPONDENT COURT ERRED IN REVERSING AND
[SETTING] ASIDE THE FINDING OF THE TRIAL COURT THAT THE
LOAN OF P500,000.00 PROCURED 21 MARCH 1978 BY
RESPONDENTS VITALIADO ARRIETA AND LILIA PEREZ IS NOT A
CORPORATE LIABILITY OF RESPONDENT INTERTRADE AND
THAT PETITIONER IS NOT LIABLE THEREON UNDER THE
'CONTINUING SURETYSHIP AGREEMENT' DATED 4 MARCH
1977.
THE CONCLUSION OF THE RESPONDENT COURT THAT THE
LOAN OF P500,000.00 PROCURED 21 MARCH 1978 BY
RESPONDENT VITALIADO ARRIETA AND LILIA PEREZ IS A
CORPORATE LIABILITY OF RESPONDENT INTERTRADE AND
CONSEQUENTLY RENDERING PETITIONER LIABLE IN HIS
PERSONAL CAPACITY AS A SURETY UNDER THE 'CONTINUING
SURETYSHIP' OF 4 MARCH 1977, IS GROSSLY ERRONEOUS
AND PREMISED ON A MISAPPREHENSION OF FACTS.
THE CONCLUSIONS AND CONSTRUCTION REACHED BY
RESPONDENT COURT FROM THE FACTS AND EVIDENCE OF
RECORD, ARE INCORRECT RESULTING IN AN ERRONEOUS
DECISION GRAVELY PREJUDICIAL TO THE SUBSTANTIAL RIGHTS
OF PETITIONER."[5]
The petition has merit.
The principal reason for respondent appellate court's reversal
of the trial court's absolution of petitioner is its finding that
the loan made by private respondent Arrieta and Lilia Perez
were admitted by Intertrade to be its own obligation.
After a careful scrutiny of the records, however, we find and
we so rule that there is neither factual nor legal basis for such
a finding by respondent Appellate Court.
First, the general rule that "the allegations, statements, or
admissions contained in a pleading are conclusive as against
the pleader"[6] is not an absolute and inflexible rule[7] and is
subject to exceptions. Rule 129, Section 4, of the Rules of
Evidence, provides:

"Section 4. Judicial admissions. An admission, verbal or

written, made by a party in the course of the proceedings in
the same case, does not require proof. The admission may be
contradicted only by showing that it was made through
palpable mistake or that no such admission was made."
(Underlining supplied)
In other words, an admission in a pleading on which a party
goes to trial may be contradicted by showing that it was made
by improvidence or mistake or that no such admission was
made, i.e., "not in the sense in which the admission was made
to appear or the admission was taken out of context."[8]
In the case at bench, we find that the respondent Court of
Appeals committed an error in appreciating the "Answer" filed
by the lawyer of Intertrade as an admission of corporate
liability for the subject loan. A careful study of the responsive
pleading filed by Atty. Francisco Pangilinan, counsel for
Intertrade, would reveal that there was neither express nor
implied admission of corporate liability warranting the
application of the general rule. Thus, the alleged judicial
admission may be contradicted and controverted because it
was taken out of context and no admission was made at all.
In any event, assuming arguendo that the responsive pleading
did contain the aforesaid admission of corporate liability, the
same may not still be given effect at all. As correctly found by
the trial court, the alleged admission made in the answer by
the counsel for Intertrade was "without any enabling act or
attendant ratification of corporate act,"[9] as would authorize
or even ratify such admission. In the absence of such
ratification or authority, such admission does not bind the
corporation.
Second, the respondent appellate court likewise adjudged
Intertrade liable because of the two letters emanating from
the office of Mr. Arrieta which the respondent court considered
"as indicating the corporate liability of the corporation."[10]
These documents and admissions cannot have the effect of a
ratification of an unauthorized act. As we elucidated in the
case of Vicente v. Geraldez,[11] "ratification can never be
made on the part of the corporation by the same persons who
wrongfully assume the power to make the contract, but the
ratification must be by the officer as governing body having
authority to make such contract." In other words, the
unauthorized act of respondent Arrieta can only be ratified by
the action of the Board of Directors and/or petitioner Aguenza
jointly with private respondent Arrieta.
We must emphasize that Intertrade has a distinct personality
separate from its members. The corporation transacts its
business only through its officers or agents. Whatever
authority these officers or agents may have is derived from
the Board of Directors or other governing body unless
conferred by the charter of the corporation. An officer's power
as an agent of the corporation must be sought from the
statute, charter, the by-laws, as in a delegation of authority to
such officer, or the acts of the Board of Directors formally
expressed or implied from a habit or custom of doing
business.[12]
Thirdly, we note that the only document to evidence the
subject transaction was the promissory note dated March 21,
1978 signed by private respondents Arrieta and Lilia Perez.
There is no indication in said document as to what capacity
the two signatories had in affixing their signatures thereon.
It is noted that the subject transaction is a loan contract for
P500,000.00 under terms and conditions which are stringent,
if not onerous. The power to borrow money is one of those
cases where even a special power of attorney is required.[13]
In the instant case, there is invariably a need of an enabling
act of the corporation to be approved by its Board of
Directors. As found by the trial court, the records of this case
is bereft of any evidence that Intertrade through its Board of
Directors, conferred upon Arrieta and Lilia Perez the authority
to contract a loan with Metrobank and execute the promissory
note as a security therefor. Neither a board resolution nor a
stockholder's resolution was presented by Metrobank to show
that Arrieta and Lilia Perez were empowered by Intertrade to
execute the promissory note.[14]
The respondents may argue that the actuation of Arrieta and
Lilia Perez was in accordance with the ordinary course of
business usages and practices of Intertrade. However, this
contention is devoid of merit because the prevailing practice
in Intertrade was to explicitly authorize an officer to contract
loans in behalf of the corporation. This is evidenced by the
fact that previous to the controversy, the Intertrade Board of
Directors, through a board resolution, jointly empowered and
authorized petitioner and respondent Arrieta to negotiate,
apply for, and open credit lines with Metrobank.[15] The

participation of these two was mandated to be joint and not

separate and individual.
In the case at bench, only respondent Arrieta, together with a
bookkeeper of the corporation, signed the promissory notes,
without the participation and approval of petitioner Aguenza.
Moreover, the enabling corporate act on this particular
transaction has not been obtained. Neither has it been shown
that any provision of the charter or any other act of the Board
of Directors exists to confer power on the Executive Vice
President acting alone and without the concurrence of its
President, to execute the disputed document.[16]
Thus, proceeding from the premise that the subject loan was
not the responsibility of Intertrade, it follows that the
undertaking of Arrieta and the bookkeeper was not an
undertaking covered by the Continuing Suretyship Agreement.
The rule is that a contract of surety is never presumed; it
must be express and cannot extend to more than what is
stipulated.[17] It is strictly construed against the creditor,
every doubt being resolved against enlarging the liability of
the surety.
The present obligation incurred in subject contract of loan, as
secured by the Arrieta and Perez promissory note, is not the
obligation of the corporation and petitioner Aguenza, but the
individual and personal obligation of private respondents
Arrieta and Lilia Perez.
WHEREFORE, the petition is GRANTED, and the questioned
decision of the Court of Appeals[18] dated February 11, 1986
is REVERSED and SET ASIDE. The judgment of the trial court
dated February 29, 1984 is hereby REINSTATED.
No Costs.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.

THIRD DIVISION
[G.R. No. 144661 and 144797. June 15, 2005]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.
SPOUSES FRANCISCO ONG and LETICIA ONG, respondents.
DECISION
GARCIA, J.:
Appealed to this Court by way of a petition for review on
certiorari are the Decision[1] dated March 5, 1999 and
Resolution dated July 19, 2000 of the Court of Appeals in CAG.R. CV No. 54919, affirming in toto an earlier decision of the
Regional Trial Court at Cagayan de Oro City, Branch 23, which
ruled in favor of herein respondents, the Spouses Francisco
Ong and Leticia Ong, in a suit for breach of contract and/or
specific performance with prayer for writ of preliminary
injunction and damages thereat commenced by them against
petitioner Development Bank of the Philippines (DBP).
Petitioner filed by registered mail a motion for extension time
to submit petition, paying the corresponding docket fees
therefor by money order. Upon receipt of the motion, the
Court docketed the case as G.R. No. 144797. Before actual
receipt of said motion, however, petitioner personally filed its
petition, which was docketed with a lower number as G.R. No.
144661. What then appears to be two (2) cases before us are
actually just one, now the subject of this decision.
The facts are simple and undisputed:
Petitioners foreclosed asset, formerly owned by one Enrique
Abada under TCT No. T-4786 and located at Corrales
Extension, Cagayan de Oro City is the subject of this
controversy. On May 25, 1988, respondent Francisco Ong with
the conformity of his wife Leticia Ong, addressed a written
offer to petitioner thru its branch manager at Cagayan de Oro
City to buy the subject property on a negotiated sale basis
and submitted his best and last offer to purchase[2] under the
following terms:
PURCHASE PRICE P136,000.00
DOWNPAYMENT .. 14,000.00
BALANCE P122,000.00
TERM: C A S H MODE OF PAYMENT: Payable upon ejection of
occupants on the property subject of my offer.
I/We am/are depositing the amount of P14,000.00 in
cash/check to accompany my/our offer, it being expressly
understood, however, that the same does not bind the DBP to
the offer until after my/our receipt of its approval by the
higher authorities of the bank. Should the bank receive an
offer from a third-party buyer higher by more than 5% or at
more advantageous term accompanied by a deposit of at
least 10% of the offered price, or a higher offer from the
former-owner for at least the updated Total Claim of the Bank
accompanied by a minimum deposit of 20% of the purchase
price, the Bank may favorably consider the higher offer and
thereafter refund my/our deposit within three (3) working days
after the determination of the most advantageous offer.
The foregoing offer was duly NOTED by petitioners branch
head at its Cagayan de Oro City Branch, Jose Z. Lagrito
(Lagrito, for brevity), and Official Receipt No. 3081947 was
issued for the amount of P14,000.00 as respondents deposit.
In a letter dated October 21, 1988[3], sent to respondents via
registered mail, Lagrito informed the spouses that the bank
recently received an offer from another interested third-partybuyer of the same property at the same price and term, but
better and more advantageous to the Bank considering that
the buyer will assume the responsibility at her expense for the
ejectment of present occupants in the said property.
Nonetheless, respondents were given in the same letter three
(3) days within which to match the said offer, failing in which
the Bank will immediately award the said property to the
other buyer, in which event respondents deposit of
P14,000.00 shall be refunded to them upon surrender of O.R.
No. 3081947.
In yet another written offer dated October 28, 1988[4],
respondents matched the said offer of the second interested
buyer by assuming the responsibility at my/our own expense
for the ejection of squatters/occupants, if any, on the property.
On April 7, 1989, there was a conference between
respondents, together with their counsel, and the bank
whereat respondents were informed why the sale could not be
awarded to them. Thereafter, in a letter dated September 6,
1990[5], respondents were notified that the property would
instead be offered for public bidding on September 24, 1990
at ten 10:00 oclock in the morning.

Feeling aggrieved by such turn of events, respondents filed

with the Regional Trial Court at Cagayan de Oro City a
complaint for breach of contract and/or specific performance
against petitioner. Thereat, the complaint was docketed as
Civil Case No. 90-422 which was raffled to Branch 23 of the
court.
After pre-trial, the parties agreed to submit the case for
judgment based on the pleadings. Accordingly, the trial court
required them to submit simultaneously their respective
memoranda within thirty (30) days. Only petitioner filed its
memorandum.
In a decision[6] dated April 25, 1995, the trial court dismissed
the complaint finding that there was no perfected contract of
sale between the parties, hence, there is no breach to speak
of since there was no contract from the very beginning.
However, upon respondents motion for reconsideration, the
trial court vacated its judgment and set the case for the
reception of evidence. This time, only the respondents
adduced their evidence consisting of the lone testimony of
respondent Francisco Ong and the documents identified by
him in the course thereof.
In his testimony, Ong gave the respondents version of what
supposedly transpired in their transaction with petitioner.
According to him, he and his wife went to the bank branch at
Cabayan de Oro City and looked for Roy Palasan, a bank clerk
thereat and told the latter that they were interested to buy
two (2) lots. Palasan went to talk to Lagrito, the branch
manager. Palasan returned to the spouses and informed them
that the branch manager agreed to sell the property to them.
Palasan further told them that they will be required to pay ten
(10%) percent of the purchase price as downpayment, adding
that if they were to pay the purchase price in cash, they would
be entitled to a ten (10%) percent discount. After some
computations, respondents rounded up the purchase price at
P136,000.00 and pegged the downpayment therefor at
P14,000.00. They were then required by Palasan to sign a
bank form supposedly to express their firm offer to purchase
the subject property. But since the form signed by them
contains the statement that the approval of higher authorities
of the bank is required to close the deal, respondents queried
Palasan about it. Palasan, however, told them that the
documents were only for formality purposes, and further
assured them that the branch manager has already agreed to
sell the subject property to them.
Having completed the presentation of their evidence,
respondents rested their case. For its part, petitioner no
longer adduced any evidence but merely opted to formally
offer its documentary exhibits. Thereafter, the case was
submitted for resolution.
On September 26, 1996, the trial court came out with a new
decision,[7] this time rendering judgment for the respondents,
as follows:
WHEREFORE, by reason of preponderance of evidence, the
Court hereby finds in favor of the plaintiffs as against the
defendant and hereby orders the defendant:
1. To execute a final sale of the lot subject matter of the
contract of sale at the original agreed price of P136,000.00;
2. Defendant to accept the balance of the purchase price from
the plaintiffs;
3. Defendant to pay moral damages in the amount of
P30,000.00;
4. Defendant to refund the amount of P10,000.00 actual
litigation expenses; and to pay attorneys fees in the amount
of P20,000.00.
SO ORDERED.
Therefrom, petitioner went on appeal to the Court of Appeals
in CA-G.R. CV No. 54919, and, on March 5, 1999, the appellate
court rendered the herein assailed decision[8] affirming in toto
that of the trial court, thus:
ACCORDINGLY, the foregoing premises considered, the
appealed decision is hereby AFFIRMED in toto.
SO ORDERED.
With its motion for reconsideration of the same decision
having been denied by the Court of Appeals in its equally
challenged resolution of July 19, 2000,[9] petitioner is now
with us thru the present recourse on the following grounds:

A.
THAT THE RESPONDENTS INTRODUCTION OF PAROL EVIDENCE
TO PROVE THE ALLEGED MEETING OF MINDS BETWEEN THE
PARTIES WAS NOT SANCTIONED BY RULE 130, SEC. 9, RULES
OF COURT, CONTRARY TO THE FINDINGS OF THE LOWER
COURTS, CONSIDERING THAT THERE WAS NO WRITTEN
CONTRACT THAT WAS EVER EXECUTED BY THE PARTIES IN
THIS CASE, BUT MERELY UNILATERAL WRITTEN
COMMUNICATIONS, AT BEST CONSTITUTING OFFERS AND
COUNTER-OFFERS.
B.
THAT THE QUANTUM OF PROOF IS WANTING TO PROVE THE
ALLEGED PERFECTION OF CONTRACT OF SALE BETWEEN THE
PARTIES BASED ON THE SOLE, UNCORROBORATED, ORAL
TESTIMONY THUS FAR PRESENTED BY THE RESPONDENTS.
C.
THAT THE BURDEN OF PROOF THAT THERE WAS PERFECTION
OF THE CONTRACT OF SALE BETWEEN THE PARTIES BASICALLY
REST WITH THE RESPONDENTS, NOTWITHSTANDING THE
NON-OBJECTION ON THE PART OF HEREIN PETITIONER DURING
THE INTRODUCTION OF THAT PAROL EVIDENCE; THE
ADMISSIBILITY OF PETITIONERS (sic.) PAROL EVIDENCE DOES
NOT AUTOMATICALLY RIPEN THE TESTIMONY AS A TRUTH
RESPECTING A MATTER OF FACT AS ITS CREDIBILITY AND
TRUSTWORTHINESS AND WEIGHT ARE STILL SUBJECT TO
JUDICIAL SCRUTINY AND APPRECIATION.
D.
THAT THERE WAS ACTUALLY OPPOSITION ON THE PART OF THE
PETITIONER TO THE CONTENTS OF THE ORAL TESTIMONY OF
THE RESPONDENT REGARDING THE ALLEGED PERFECTION OF
CONTRACT OF SALE BECAUSE THE PETITIONER HAD ALREADY
INTERPOSED THEIR DEFENSES WHEN IT FILED A
MEMORANDUM ATTACHING THEREIN THE DOCUMENTARY AS
WELL AS DECLARATIONS IN ITS PLEADINGS ON THE NONPERFECTION OF SUCH CONTRACT WHEN THE CASE WAS THEN
SUBMITTED FOR JUDGMENT ON THE PLEADINGS, AS AGREED
BY THE PARTIES DURING THE PRE-TRIAL, AND SUCH
EVIDENCES WERE ALREADY PASSED UPON BY THE COURT
WHEN IT RENDERED A JUDGMENT DATED APRIL 25, 1995.
We GRANT the petition.
At the very core of the controversy is the question of whether
or not there actually was a perfected contract of sale between
petitioner and respondents, for which the Court may compel
petitioner to issue a board resolution approving the sale and
to execute the final deed of sale in respondents favor, and/or
hold petitioner liable for a breach thereof. Needless to state,
without a perfected contract of sale, there could be no cause
of action for specific performance or breach thereof.
The trial court went on one direction by ruling in its earlier
decision of April 25, 1995 that there was no perfected
contract, but upon respondents motion for reconsideration,
went exactly the opposite path by completely reversing itself
in its herein challenged decision of September 26, 1996.
Apparently, the trial courts ruling that there was already a
perfected contract of sale was premised on its following
factual findings:
1. That plaintiff [respondents] made a downpayment in a
check that was subsequently encashed by the defendant
[petitioner] bank;
2. That the sister-in-law of plaintiff [respondents] entered into
the same arrangement and was able to buy the property she
wanted to buy from defendant [petitioner] bank;
3. That defendant [petitioner] never presented any witness to
rebut the positive and clear testimony of plaintiff
[respondents] that it was a perfected contract of sale entered
into by the former with the defendant [petitioner] bank.[10]
Sustaining the foregoing factual findings of the trial court, the
appellate court wrote in its assailed decision of March 5, 1999:
This positive and clear testimony of [respondent] Ong was not
objected to nor rebutted by the [petiotioner]. Notably, the
bank personnel involved in the transaction, namely, Roy
Palasan and the Branch Manager of the [petitioners] Cagayan
de Oro Branch, Joe Lagrito, were never presented to refute the
testimony of the [respondents] that the bank has agreed to
sell the property to the [respondents]. Suffice it to state that
[respondents] were entitled to rely on the representation of

Lagrito who, after all, is the banks manager. Under the

premise that a bank is bound by the obligation contracted by
its officers, the contract of sale between [petitioner] and the
[respondents] was perfected when Palasan and Lagrito
communicated the approval of the sale of the lot to the
[respondents].
Significantly, the unrebutted testimony of Francisco Ong
reveals that Norma Silfavan, [respondents] sister, made a
similar offer to the [petitioner] under the same terms and
conditions as to that of the [respondents], and was likewise
assured by the same bank personnel that her offer, along with
the [respondents] offer was already approved. Eventually, the
transaction resulted in a consummated sale between Silfavan
and DBP. Under these premises, We can not see any reason
why the [petitioner] did not accord the same treatment to the
[respondents] who were similarly situated.
Evidently, the two (2) courts below were convinced that the
actuation of Palasan, a mere bank clerk, upon which
respondents relied in believing that their offer to purchase
was already approved by the bank manager, would bind the
bank to a perfected contract of sale between the parties in
this case. The Court of Appeals further added that the
acceptance of the offer to purchase was sufficiently
established from the parol evidence adduced by respondents
during the trial.
We do not agree.
Concededly, in petitions for review on certiorari, our task is
not to review once again the factual findings of the Court of
Appeals and the trial court, but to determine if, on the basis of
the facts thus found, the conclusions of law reached are
correct or not.
Judging from the findings of the two (2) courts below and the
testimony of respondent Francisco Ong himself, it appears
clear to us that the transaction between the respondents and
the petitioner was limited to Palasan, one of the clerks of
petitioners branch in Cagayan de Oro City. Lagrito, the branch
manager, had no personal or direct communication with
respondents to express his alleged consent to the sale
transaction. Thus, the undisputed evidence showed that it was
Palasan, a mere bank clerk, and not the branch manager
himself who assured respondents that theirs was a closed
deal.
We are very much aware of our pronouncement in Rural Bank
of Milaor vs. Ocfemia,[11] involving a mandamus suit where
the supposed buyer of a foreclosed property from a bank
sought a court order to compel the bank to issue the required
board resolution confirming the sale between the parties
therein. There, this Court, speaking thru Mr. Justice Artemio
Panganiban, stated:
Notwithstanding the putative authority of the manager to bind
the bank in the Deed of Sale, petitioner has failed to file an
answer to the Petition below within the reglementary period,
let alone present evidence controverting such authority.
Indeed, when one of herein respondents, Marife S. Nio, went
to the bank to ask for the board resolution, she was merely
told to bring the receipts. The bank failed to categorically
declare that Tena had no authority. This Court stresses the
following:
. . . Corporate transactions would speedily come to a standstill
were every person dealing with a corporation held duty-bound
to disbelieve every act of its responsible officers, no matter
how regular they should appear on their face. This Court has
observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655,
that
In passing upon the liability of a corporation in cases of this
kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily
rely upon the external manifestation of corporate consent.
The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law; and we
would be sorry to announce a doctrine which would permit the
property of man in the city of Paris to be whisked out of his
hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority
had been used in the manner disclosed in this case. As
already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to do
acts within the scope of an apparent authority, and thus holds
him out to the public as possessing power to do those acts,
the corporation will, as against any one who has in good faith

dealt with the corporation through such agent, be estopped

from denying his authority; and where it is said 'if the
corporation permits this means the same as 'if the thing is
permitted by the directing power of the corporation.[12]
In this light, the bank is estopped from questioning the
authority of the bank manager to enter into the contract of
sale. If a corporation knowingly permits one of its officers or
any other agent to act within the scope of an apparent
authority, it holds the agent out to the public as possessing
the power to do those acts; thus, the corporation will, as
against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent's authority.
[13]
Unquestionably, petitioner has authorized Tena to enter into
the Deed of Sale. Accordingly, it has a clear legal duty to issue
the board resolution sought by respondents. Having
authorized her to sell the property, it behooves the bank to
confirm the Deed of Sale so that the buyers may enjoy its full
use.
There is, however, a striking and very material difference
between the aforecited case and the one at bar. For, unlike in
Milaor where it was the branch manager who approved the
sale for and in behalf of the bank, here, there is absolutely no
approval whatsoever by any responsible bank officer of the
petitioner. True it is that the signature of branch manager
Lagrito appears below the typewritten word NOTED at the
bottom of respondents offer to purchase dated May 25, 1988.
[14] By no stretch of imagination, however, can the mere
NOTING of such an offer be taken to mean an approval of the
supposed sale. Quite the contrary, the very circumstance that
the offer to purchase was merely NOTED by the branch
manager and not approved, is a clear indication that there is
no perfected contract of sale to speak of.
The representation of Roy Palasan, a mere clerk at petitioners
Cagayan de Oro City branch, that the manager had already
approved the sale, even if true, cannot bind the petitioner
bank to a contract of sale with respondents, it being obvious
to us that such a clerk is not among the bank officers upon
whom such putative authority may be reposed by a third
party. There is, thus, no legal basis to bind petitioner into any
valid contract of sale with the respondents, given the absolute
absence of any approval or consent by any responsible officer
of petitioner bank.
And because there is here no perfected contract of sale
between the parties, respondents action for breach of contract
and/or specific performance is simply without any leg to stand
on and must therefore fall.
We also disagree with the Court of Appeals that the
encashment of the check representing the P14,000.00 deposit
in relation to respondents offer to purchase is an indication or
proof of perfection of a contract of sale. It must be noted that
the very documents[15] signed by the respondents as their
offer to purchase unmistakably state that the deposit shall
only form part of the purchase price if the offer to purchase is
approved, it being expressly understood xxx that the same
(i.e., the deposit) does not bind DBP to the offer until my/our
receipt of its approval by higher authorities of the bank. It
may be so that the official receipt issued therefor by the
petitioner termed such deposit as a downpayment. But the
very written offers of the respondents unequivocably and
invariably speak of such amount as deposit, above deposit,
we are depositing the amount of P14,000.00. Since there
never was any approval or acceptance by the higher
authorities of petitioner of respondents offer to purchase, the
encashment of the check can not in any way represent partial
payment of any purchase price.
With the hard reality that no approval or acceptance of
respondents offer to buy exists in this case, any independent
transaction between petitioner and another third-party, like
the one involving respondents sister, would be irrelevant and
immaterial insofar as respondents own transaction with the
petitioner is concerned. Besides, apart from saying that
respondents sister made a similar offer to the [petitioner]
under the same terms and conditions as to that of the
[respondents], and was likewise assured by the same bank
personnel that her offer xxx was already approved, which
eventually resulted into a consummated sale between (the
sister) and DBP, the Court of Appeals made no finding that the
sisters transaction with the petitioner was made exactly under
the same circumstances obtaining in the present case. In any
event, petitioners favorable action on the offer of respondents
sister is hardly, if ever, relevant and determinative in the
resolution of the legal issue presented in this case.

In sum, we cannot, in law, sustain the herein challenged

issuances of the Court of Appeals.
WHEREFORE, the instant petition is GRANTED and the assailed
decision and resolution of the Court of Appeals REVERSED and
SET ASIDE. The complaint filed in this case is accordingly
DISMISSED.
No pronouncement as to costs.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and
Carpio-Morales, JJ., concur.

SECOND DIVISION

KOJI YASUMA, G.R. No. 150350

Petitioner,
Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA* and
GARCIA, JJ.
HEIRS OF CECILIO S. DE VILLA
and EAST CORDILLERA MINING
CORPORATION,
Respondents. Promulgated:
August 22, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -----x
DECISION
CORONA, J.:
This is a petition for review on certiorari[1] of a decision[2] of
the Court of Appeals (CA) dated October 18, 2001 in CA-G.R.
CV No. 61755.

The antecedent facts follow.

On September 15, 1988, October 21, 1988 and December 5,
1988, Cecilio S. de Villa obtained loans from petitioner Koji
Yasuma in the amounts of P1,100,000, P100,000 and
P100,000, respectively, for the total amount of P1.3 million.
These loans were evidenced by three promissory notes signed
by de Villa as borrower. The last promissory note in the
amount of P1,300,000 cancelled the first two notes.

The loans were initially secured by three separate real estate

mortgages on a parcel of land with Transfer Certificate of Title
No. 176575 in the name of respondent East Cordillera Mining
Corporation. The deeds of mortgage were executed on the
dates the loans were obtained, signed by de Villa as president
of respondent corporation. The third real estate mortgage
later cancelled the first two.[3]

For failure of de Villa to pay, petitioner filed a collection suit in

the Regional Trial Court of Makati City, Branch 148 (RTC-Br.
148) against de Villa and respondent corporation.[4] The RTCBr. 148 declared de Villa and respondent corporation in
default and resolved the case in favor of petitioner. On appeal,
however, the judgment of RTC-Br. 148 was annulled on the
ground of improper service of summons.[5] Thus, the case
was remanded for retrial.

During the pendency of the case in the RTC-Br. 148, de Villa

died. Petitioner consequently amended the complaint and
impleaded the heirs of de Villa as defendants.[6]

After the case was re-heard, the RTC of Makati City, Branch
139 (RTC-Br. 139) rendered judgment on November 13, 1998
in favor of petitioner and against respondent corporation. It
ordered respondent corporation to pay petitioner P1.3 million
plus legal interest, attorneys fees, liquidated damages and
costs of suit. The complaint was dismissed against respondent
heirs.[7]
On appeal, the CA reversed and set aside the decision of RTCBr. 139. It held that the loan was personal to de Villa and that
the mortgage was null and void for lack of authority from the
corporation.

Petitioner is now before this Court with the following

assignment of errors:

1.
THE [CA], WITH ALL DUE RESPECT, COMMITTED
PALPABLE AND REVERSIBLE ERROR OF LAW WHEN IT
DECLARED THAT THE CORPORATION DID NOT RATIFY THE ACT
OF ITS PRESIDENT IN OBTAINING LOANS FROM PETITIONER
DESPITE ITS ADMISSION THAT IT RECEIVED THE MONEY OF
THE PETITIONER.
2.
THE [CA], WITH ALL DUE RESPECT, COMMITTED
PALPABLE AND REVERSIBLE ERROR OF LAW WHEN IT TOTALLY
DISREGARDED THE ADMITTED FACTS AND ISSUES AGREED
UPON BY THE PARTIES AND APPROVED BY THE TRIAL COURT
DURING THE PRE-TRIAL.
3.
THE [CA], WITH ALL DUE RESPECT, COMMITTED
PALPABLE AND REVERSIBLE ERROR OF LAW WHEN IT SET
ASIDE THE REAL ESTATE MORTGAGE AND THE AWARD OF
ATTORNEYS FEES, 10% LIQUIDATED DAMAGES AND THE
COSTS OF SUIT.
4.
THE [CA], WITH ALL DUE RESPECT, COMMITTED
PALPABLE AND REVERSIBLE ERROR OF LAW WHEN IT SET
ASIDE THE AWARD OF INTEREST BY WAY OF DAMAGES IN
FAVOR OF PETITIONER.[8]
The issues to be resolved are the following:
1)
whether the loans were personal liabilities of de
Villa or debts of respondent corporation and
2)
whether the mortgage on respondent
corporations property was null and void for having been
executed without its authority.

We begin with a brief study of some well-settled legal

doctrines relevant to the disposition of this case.

PERSONAL OR CORPORATE LIABILITY?

A corporation is a juridical person, separate and distinct from

its stockholders. Being a juridical entity, a corporation may act
through its board of directors, as provided in Section 23 of the
Corporation Code of the Philippines:[9]
Sec. 23. The Board of Directors or Trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled
and held by the board of directors or trustees
xxx xxx xxx
The corporation can also act through its corporate officers
who may be authorized either expressly by the by-laws or
board resolutions or impliedly such as by general practice or
policy or as are implied from express powers.[10] The general
principles of agency govern the relation between the
corporation and its officers or agents.[11] When authorized,
their acts can bind the corporation. Conversely, when
unauthorized, their acts cannot bind it.
However, the corporation may ratify the unauthorized act of
its corporate officer.[12] Ratification means that the principal
voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. It is this voluntary
choice, knowingly made, which amounts to a ratification of
what was theretofore unauthorized and becomes the
authorized act of the party so making the ratification.[13] The
substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority.[14] Ratification
can be made either expressly or impliedly. Implied ratification
may take various forms like silence or acquiescence, acts
showing approval or adoption of the act, or acceptance and
retention of benefits flowing therefrom.[15]

The power to borrow money is one of those cases where

corporate officers as agents of the corporation need a special
power of attorney.[16] In the case at bar, no special power of
attorney conferring authority on de Villa was ever presented.
The promissory notes evidencing the loans were signed by de
Villa (who was the president of respondent corporation) as
borrower without indicating in what capacity he was signing

them. In fact, there was no mention at all of respondent

corporation. On their face, they appeared to be personal loans
of de Villa.

Petitioner, however, contends that respondent corporations

admission that it received the total amount of P1.3 million was
effectively a ratification of the act of its former president.[17]
It appears that, in the pre-trial order dated March 4, 1997
issued by RTC-Br. 139, respondent corporation indeed
admitted the following:

in good faith. Good faith is always presumed.[24] Petitioner

did not show that the corporation acted in bad faith.

It follows that respondent corporation was not liable for the

subsequent loss of the money which it accepted as an
investment. It could not be faulted for not knowing that it was
the proceeds of a loan obtained by de Villa. It was under no
obligation to check the source of the investments which went
into its coffers. As long as the investment was used for
legitimate corporate purposes, the investor bore the risk of
loss.

xxx xxx xxx

3. Defendants ADMIT that the total amount of P1.3 Million
subject matter of the Promissory Notes was RECEIVED by the
Defendant-Corporation;[18] (emphasis supplied)
xxx xxx xxx

Therefore, on the first issue, the loan was personal to de Villa.

There was no basis to hold the corporation liable since there
was no authority, express, implied or apparent, given to de
Villa to borrow money from petitioner. Neither was there any
subsequent ratification of his act.

In its answer, respondent corporation stated:

7. The sum of money which [petitioner] sought to recover
form herein [respondents] is not really a loan but his
investment to the mining project of [respondent] corporation
which unfortunately did not succeed due to the delays caused
by typhoons and bad rainy season in the Benguet mountains
causing landslides in the mining and milling site during the
latter part of 1988, and the killer earthquake of 1990 which
destroyed the mining area. As investment to a losing business
venture, he is not entitled to claim payment neither could he
treat it as a loan.[19]

The CA held that this admission was not tantamount to

ratification because what respondent corporation admitted
was that the money was in fact received as an investment. It
concluded that:
even if the [respondent corporation] received the money, it
cannot be held responsible for not knowing the preceding
transaction between the [p]resident and the [petitioner] as in
fact there was a misrepresentation made to the [respondent
corporation], to the effect that the money was an investment
and not a loan. The alleged investment is actually a personal
loan of Cecilio de Villa.[20]

Petitioners contention has no merit. There was no showing

that respondent corporation ever authorized de Villa to obtain
the loans on its behalf. The notes did not show that de Villa
acted on behalf of the corporation. Actually, the corporation
would not have figured in the transaction at all had it not been
for its admission that it received the amount of P1.3 million.
As could be gleaned from the promissory notes, it was a
stranger to the transaction.

Thus, we conclude that petitioner himself did not consider the

corporation to be his debtor for if he really knew that de Villa
was obtaining the loan on behalf of the corporation, then why
did he allow the notes to reflect only the personal liability of
de Villa?[21] Even the demand letters of petitioner were
personally addressed to de Villa and not to respondent
corporation.[22] Undoubtedly, petitioner dealt with de Villa
purely in his personal capacity.
Respondent corporation could not have ratified the act of de
Villa because there was no proof that it knew that he took out
a loan on its behalf. As stated earlier, ratification is a
voluntary choice that is knowingly made. The corporation
could not have ratified an act it had no knowledge of:
xxx xxx xxx
Ordinarily, the principal must have full knowledge at the time
of ratification of all the material facts and circumstances
relating to the unauthorized act of the person who assumed to
act as agent. Thus, if material facts were suppressed or
unknown, there can be no valid ratification . [23]

The fact that the corporation admitted receiving the proceeds

of the loan did not amount to ratification of the loan. It
accepted the amount from de Villa, its president at that time,

WAS THE MORTGAGE VALID OR VOID?

Petitioner insists that the mortgage executed by de Villa, as
president of the corporation, was ratified by the latter since
the mortgage was an accessory contract of the loan.[25] We
disagree.

A special power of attorney is necessary to create or convey

real rights over immovable property.[26] Furthermore, the
special power of attorney must appear in a public document.
[27] In the absence of a special power of attorney in favor of
de Villa as president of the corporation, no valid mortgage
could have been executed by him.[28] Since the mortgage
was void, it could not be ratified.

Petitioner cannot blame anyone but himself. He did not check

if the person he was dealing with had the authority to
mortgage the property being offered as collateral.

Given that the loan and mortgage were not binding on

respondent corporation, the latter cannot be held liable for
interest, attorneys fees and liquidated damages arising from
the loan.

PERSONAL LIABILITY OF DE VILLA

The liability arising from the loan was the sole indebtedness of
de Villa (or of his estate after his death). Petitioner vigorously
sought to make respondent corporation liable but exerted no
effort at all to argue for the liability of respondent heirs. The
trial court correctly dismissed the case against the latter.
Petitioners remedy now is to file a money claim in the
settlement proceedings of de Villas estate, if not too late, as
indicated in
Rule 86[29] of the Rules of Court.
WHEREFORE, the petition is hereby DENIED. The October 18,
2001 decision of the Court of Appeals in CA-G.R. CV No. 61755
is AFFIRMED.
Costs against petitioner.
SO ORDERED.

RENATO C. CORONA
Associate Justice

WE CONCUR:
REYNATO S. PUNO
Associate Justice
Chairperson
(on official business)
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice
ADOLFO S. AZCUNA
Associate Justice

CANCIO C. GARCIA
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

REYNATO S. PUNO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the

Division Chairpersons Attestation, I certify that the
conclusions in the above decision had been reached in
consultation before the case was assigned to the writer of the
opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18287

March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellee,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendantappellant.
----------------------------G.R. No. L-18155

March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellant,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendantappellee.
Vicente J. Francisco for plaintiff-appellee.
The Government Corporate Counsel for defendant-appellant.
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the
decision of the Court of First Instance of Rizal (Hon. Angel H.
Mojica, presiding), in its Civil Case No. 2088-P, entitled
"Trinidad J. Francisco, plaintiff, vs. Government Service
Insurance System, defendant", the dispositive part of which
reads as follows:
WHEREFORE, judgment is hereby rendered: (a) Declaring null
and void the consolidation in the name of the defendant,
Government Service Insurance System, of the title of the VICMARI Compound; said title shall be restored to the plaintiff;
and all payments made by the plaintiff, after her offer had
been accepted by the defendant, must be credited as
amortizations on her loan; and (b) Ordering the defendant to
abide by the terms of the contract created by plaintiff's offer
and it's unconditional acceptance, with costs against the
defendant.
The plaintiff, Trinidad J. Francisco, likewise appealed
separately (L-18155), because the trial court did not award
the P535,000.00 damages and attorney's fees she claimed.
Both appeals are, therefore, jointly treated in this decision.
The following facts are admitted by the parties: On 10 October
1956, the plaintiff, Trinidad J. Francisco, in consideration of a
loan in the amount of P400,000.00, out of which the sum of
P336,100.00 was released to her, mortgaged in favor of the
defendant, Government Service Insurance System
(hereinafter referred to as the System) a parcel of land
containing an area of 18,232 square meters, with twenty-one
(21) bungalows, known as Vic-Mari Compound, located at
Baesa, Quezon City, payable within ten (10) years in monthly
installments of P3,902.41, and with interest of 7% per annum
compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the
mortgage on the ground that up to that date the plaintiffmortgagor was in arrears on her monthly installments in the
amount of P52,000.00. Payments made by the plaintiff at the
time of foreclosure amounted to P130,000.00. The System
itself was the buyer of the property in the foreclosure sale.
On 20 February 1959, the plaintiff's father, Atty. Vicente J.
Francisco, sent a letter to the general manager of the
defendant corporation, Mr. Rodolfo P. Andal, the material
portion of which recited as follows:
Yesterday, I was finally able to collect what the Government
owed me and I now propose to pay said amount of P30,000 to
the GSIS if it would agree that after such payment the
foreclosure of my daughter's mortgage would be set aside. I
am aware that the amount of P30,000 which I offer to pay will
not cover the total arrearage of P52,000 but as regards the
balance, I propose this arrangement: for the GSIS to take over
the administration of the mortgaged property and to collect
the monthly installments, amounting to about P5,000, due on
the unpaid purchase price of more than 31 lots and houses
therein and the monthly installments collected shall be
applied to the payment of Miss Francisco's arrearage until the
same is fully covered. It is requested, however, that from the
amount of the monthly installments collected, the sum of
P350.00 be deducted for necessary expenses, such as to pay
the security guard, the street-caretaker, the Meralco Bill for
the street lights and sundry items.

It will be noted that the collectible income each month from

the mortgaged property, which as I said consists of
installments amounting to about P5,000, is more than enough
to cover the monthly amortization on Miss Francisco's loan.
Indeed, had she not encountered difficulties, due to
unforeseen circumstances, in collecting the said installments,
she could have paid the amortizations as they fell due and
there would have been really no need for the GSIS to resort to
foreclosure.
The proposed administration by the GSIS of the mortgaged
property will continue even after Miss Francisco's account
shall have been kept up to date. However, once the arrears
shall have been paid, whatever amount of the monthly
installments collected in excess of the amortization due on
the loan will be turned over to Miss Francisco.
I make the foregoing proposal to show Francisco's sincere
desire to work out any fair arrangement for the settlement of
her obligation. I trust that the GSIS, under the broadminded
policies of your administration, would give it serious
consideration.
Sincerely,.
s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO
On the same date, 20 February 1959, Atty. Francisco received
the following telegram:.
VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF
FORECLOSED PROPERTY OF YOUR DAUGHTER
ANDAL"
On 28 February 1959, Atty. Francisco remitted to the System,
through Andal, a check for P30,000.00, with an accompanying
letter, which reads:
I am sending you herewith BPI Check No. B-299484 for Thirty
Thousand Pesos (P30,000.00) in accordance with my letter of
February 20th and your reply thereto of the same date, which
reads:
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF
FORECLOSED PROPERTY OF YOUR DAUGHTER
xxx

xxx

xxx

The defendant received the amount of P30,000.00, and issued

therefor its official receipt No. 1209874, dated 4 March 1959.
It did not, however, take over the administration of the
compound. In the meantime, the plaintiff received the
monthly payments of some of the occupants thereat; then on
4 March 1960, she remitted, through her father, the amount of
P44,121.29, representing the total monthly installments that
she received from the occupants for the period from March to
December 1959 and January to February 1960, minus
expenses and real estate taxes. The defendant also received
this amount, and issued the corresponding official receipt.
Remittances, all accompanied by letters, corresponding to the
months of March, April, May, and June, 1960 and totalling
P24,604.81 were also sent by the plaintiff to the defendant
from time to time, all of which were received and duly
receipted for.
Then the System sent three (3) letters, one dated 29 January
1960, which was signed by its assistant general manager, and
the other two letters, dated 19 and 26 February 1960,
respectively, which were signed by Andal, asking the plaintiff
for a proposal for the payment of her indebtedness, since
according to the System the one-year period for redemption
had expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960,
protesting against the System's request for proposal of
payment and inviting its attention to the concluded contract
generated by his offer of 20 February 1959, and its
acceptance by telegram of the same date, the compliance of
the terms of the offer already commenced by the plaintiff, and
the misapplication by the System of the remittances she had
made, and requesting the proper corrections.
By letter, dated 31 May 1960, the defendant countered the
preceding protest that, by all means, the plaintiff should pay
attorney's fees of P35,644.14, publication expenses, filing fee
of P301.00, and surcharge of P23.64 for the foreclosure work

done; that the telegram should be disregarded in view of its

failure to express the contents of the board resolution due to
the error of its minor employees in couching the correct
wording of the telegram. A copy of the excerpts of the
resolution of the Board of Directors (No. 380, February 20,
1959) was attached to the letter, showing the approval of
Francisco's offer
... subject to the condition that Mr. Vicente J. Francisco shall
pay all expenses incurred by the GSIS in the foreclosure of the
mortgage.
Inasmuch as, according to the defendant, the remittances
previously made by Atty. Francisco were allegedly not
sufficient to pay off her daughter's arrears, including
attorney's fees incurred by the defendant in foreclosing the
mortgage, and the one-year period for redemption has
expired, said defendant, on 5 July 1960, consolidated the title
to the compound in its name, and gave notice thereof to the
plaintiff on 26 July 1960 and to each occupant of the
compound.
Hence, the plaintiff instituted the present suit, for specific
performance and damages. The defendant answered,
pleading that the binding acceptance of Francisco's offer was
the resolution of the Board, and that Andal's telegram, being
erroneous, should be disregarded. After trial, the court below
found that the offer of Atty. Francisco, dated 20 February
1959, made on behalf of his daughter, had been unqualifiedly
accepted, and was binding, and rendered judgment as noted
at the start of this opinion.
The defendant-appellant corporation assigns six (6) errors
allegedly committed by the lower court, all of which, however,
are resolvable on the single issue as to whether or not the
telegram generated a contract that is valid and binding upon
the parties.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t
We find no reason for altering the conclusion reached by the
court below that the offer of compromise made by plaintiff in
the letter, Exhibit "A", had been validly accepted, and was
binding on the defendant. The terms of the offer were clear,
and over the signature of defendant's general manager,
Rodolfo Andal, plaintiff was informed telegraphically that her
proposal had been accepted. There was nothing in the
telegram that hinted at any anomaly, or gave ground to
suspect its veracity, and the plaintiff, therefore, can not be
blamed for relying upon it. There is no denying that the
telegram was within Andal's apparent authority, but the
defense is that he did not sign it, but that it was sent by the
Board Secretary in his name and without his knowledge.
Assuming this to be true, how was appellee to know it?
Corporate transactions would speedily come to a standstill
were every person dealing with a corporation held duty-bound
to disbelieve every act of its responsible officers, no matter
how regular they should appear on their face. This Court has
observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655,
that
In passing upon the liability of a corporation in cases of this
kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily
rely upon the external manifestations of corporate consent.
The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law; and we
would be sorry to announce a doctrine which would permit the
property of a man in the city of Paris to be whisked out of his
hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority
had been used in the manner disclosed in this case. As
already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to do
acts within the scope of an apparent authority, and thus holds
him out to the public as possessing power to do those acts,
the corporation will, as against any one who has in good faith
dealt with the corporation through such agent, be estopped
from denying his authority; and where it is said "if the
corporation permits" this means the same as "if the thing is
permitted by the directing power of the corporation."
It has also been decided that

A very large part of the business of the country is carried on

by corporations. It certainly is not the practice of persons
dealing with officers or agents who assume to act for such
entities to insist on being shown the resolution of the board of
directors authorizing the particular officer or agent to transact
the particular business which he assumes to conduct. A
person who knows that the officer or agent of the corporation
habitually transacts certain kinds of business for such
corporation under circumstances which necessarily show
knowledge on the part of those charged with the conduct of
the corporate business assumes, as he has the right to
assume, that such agent or officer is acting within the scope
of his authority. (Curtis Land & Loan Co. vs. Interior Land Co.,
137 Wis. 341, 118 N.W. 853, 129 Am. St. Rep. 1068; as cited
in 2 Fletcher's Encyclopedia, Priv. Corp. 263, perm. Ed.)
Indeed, it is well-settled that
If a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it,
the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good
faith with such officers or agents. (2 Fletcher's Encyclopedia,
Priv. Corp. 255, Perm. Ed.)
Hence, even if it were the board secretary who sent the
telegram, the corporation could not evade the binding effect
produced by the telegram..
The defendant-appellant does not disown the telegram, and
even asserts that it came from its offices, as may be gleaned
from the letter, dated 31 May 1960, to Atty. Francisco, and
signed "R. P. Andal, general manager by Leovigildo
Monasterial, legal counsel", wherein these phrases occur: "the
telegram sent ... by this office" and "the telegram we sent
your" (emphasis supplied), but it alleges mistake in couching
the correct wording. This alleged mistake cannot be taken
seriously, because while the telegram is dated 20 February
1959, the defendant informed Atty. Francisco of the alleged
mistake only on 31 May 1960, and all the while it accepted
the various other remittances, starting on 28 February 1959,
sent by the plaintiff to it in compliance with her performance
of her part of the new contract.
The inequity of permitting the System to deny its acceptance
become more patent when account is taken of the fact that in
remitting the payment of P30,000 advanced by her father,
plaintiff's letter to Mr. Andal quoted verbatim the telegram of
acceptance. This was in itself notice to the corporation of the
terms of the allegedly unauthorized telegram, for as
Ballentine says:
Knowledge of facts acquired or possessed by an officer or
agent of a corporation in the course of his employment, and in
relation to matters within the scope of his authority, is notice
to the corporation, whether he communicates such knowledge
or not. (Ballentine, Law on Corporations, section 112.)
since a corporation cannot see, or know, anything except
through its officers.
Yet, notwithstanding this notice, the defendant System
pocketed the amount, and kept silent about the telegram not
being in accordance with the true facts, as it now alleges. This
silence, taken together with the unconditional acceptance of
three other subsequent remittances from plaintiff, constitutes
in itself a binding ratification of the original agreement (Civil
Code, Art. 1393).
ART. 1393. Ratification may be effected expressly or tacitly. It
is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract voidable
and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an
intention to waive his right.
Nowhere else do the circumstances call more insistently for
the application of the equitable maxim that between two
innocent parties, the one who made it possible for the wrong
to be done should be the one to bear the resulting loss..
The defendant's assertion that the telegram came from it but
that it was incorrectly worded renders unnecessary to resolve
the other point on controversy as to whether the said
telegram constitutes an actionable document..
Since the terms offered by the plaintiff in the letter of 20
February 1959 (Exhibit "A") provided for the setting aside of
the foreclosure effected by the defendant System, the
acceptance of the offer left the account of plaintiff in the same
condition as if no foreclosure had taken place. It follows, as
the lower court has correctly held, that the right of the System

to collect attorneys' fees equivalent to 10% of the due

(P35,694.14) and the expenses and charges of P3,300.00 may
no longer be enforced, since by the express terms of the
mortgage contract, these sums were collectible only "in the
event of foreclosure."
The court a quo also called attention to the unconscionability
of defendant's charging the attorney's fees, totalling over
P35,000.00; and this point appears well-taken, considering
that the foreclosure was merely extra-judicial, and the
attorneys' work was limited to requiring the sheriff to
effectuate the foreclosure. However, in view of the parties'
agreement to set the same aside, with the consequential
elimination of such incidental charges, the matter of
unreasonableness of the counsel fees need not be labored
further.
Turning now to the plaintiff's separate appeal (Case G.R. No. L18155): Her prayer for an award of actual or compensatory
damages for P83,333.33 is predicated on her alleged
unrealized profits due to her inability to sell the compound for
the price of P750,000.00 offered by one Vicente Alunan, which
sale was allegedly blocked because the System consolidated
the title to the property in its name. Plaintiff reckons the
amount of P83,333.33 by placing the actual value of the
property at P666,666.67, a figure arrived at by assuming that
the System's loan of P400,000.00 constitutes 60% of the
actual value of the security. The court a quo correctly refused
to award such actual or compensatory damages because it
could not determine with reasonable certainty the difference
between the offered price and the actual value of the
property, for lack of competent evidence. Without proof we
cannot assume, or take judicial notice, as suggested by the
plaintiff, that the practice of lending institutions in the country
is to give out as loan 60% of the actual value of the collateral.
Nor should we lose sight of the fact that the price offered by
Alunan was payable in installments covering five years, so
that it may not actually represent true market values.
Nor was there error in the appealed decision in denying moral
damages, not only on account of the plaintiff's failure to take
the witness stand and testify to her social humiliation,
wounded feelings, anxiety, etc., as the decision holds, but
primarily because a breach of contract like that of defendant,
not being malicious or fraudulent, does not warrant the award
of moral damages under Article 2220 of the Civil Code
(Ventanilla vs. Centeno, L-14333, 28 Jan. 1961; Fores vs.
Miranda, L-12163, 4 March 1959).
There is no basis for awarding exemplary damages either,
because this species of damages is only allowed in addition to
moral, temperate, liquidated, or compensatory damages,
none of which have been allowed in this case, for reasons
herein before discussed (Art. 2234, Civil Code; Velayo vs. Shell
Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs.
Aragon and Lorza, L-5164, Jan. 27, 1953, 49 O.G. No. 2, 515).
As to attorneys' fees, we agree with the trial court's stand that
in view of the absence of gross and evident bad faith in
defendant's refusal to satisfy the plaintiff's claim, and there
being none of the other grounds enumerated in Article 2208
of the Civil Code, such absence precludes a recovery. The
award of attorneys' fees is essentially discretionary in the trial
court, and no abuse of discretion has been shown.
FOR THE FOREGOING REASONS, the appealed decision is
hereby affirmed, with costs against the defendant
Government Service Insurance System, in G.R. No.L-18287.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.

SECOND DIVISION

WOODCHILD HOLDINGS, INC., G.R. No. 140667

Petitioner,
Present:
PUNO, J., Chairman,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

ROXAS ELECTRIC AND Promulgated:

CONSTRUCTION COMPANY, INC.,
Respondent. August 12, 2004
x-------------------------------------------------x
DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of

the Court of Appeals in CA-G.R. CV No. 56125 reversing the
Decision[2] of the Regional Trial Court of Makati, Branch 57,
which ruled in favor of the petitioner.
The Antecedents

P5,000,000, receipt of which was acknowledged by Roxas

under the following terms and conditions:
The Vendor agree (sic), as it hereby agrees and binds itself to
give Vendee the beneficial use of and a right of way from
Sumulong Highway to the property herein conveyed consists
of 25 square meters wide to be used as the latters egress
from and ingress to and an additional 25 square meters in the
corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering
area for Vendees vehicles.
The Vendor agrees that in the event that the right of way is
insufficient for the Vendees use (ex entry of a 45-foot
container) the Vendor agrees to sell additional square meters
from its current adjacent property to allow the Vendee full
access and full use of the property.

The Vendor hereby undertakes and agrees, at its account, to

defend the title of the Vendee to the parcel of land and
improvements herein conveyed, against all claims of any and
all persons or entities, and that the Vendor hereby warrants
the right of the Vendee to possess and own the said parcel of
land and improvements thereon and will defend the Vendee
against all present and future claims and/or action in relation
thereto, judicial and/or administrative. In particular, the
Vendor shall eject all existing squatters and occupants of the
premises within two (2) weeks from the signing hereof. In case
of failure on the part of the Vendor to eject all occupants and
squatters within the two-week period or breach of any of the
stipulations, covenants and terms and conditions herein
provided and that of contract to sell dated 1 July 1991, the
Vendee shall have the right to cancel the sale and demand
reimbursement for all payments made to the Vendor with
interest thereon at 36% per annum.[8]

The respondent Roxas Electric and Construction Company,

Inc. (RECCI), formerly the Roxas Electric and Construction
Company, was the
owner of two parcels of land, identified as Lot No. 491-A-3-B-1
covered by Transfer Certificate of Title (TCT) No. 78085 and
Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of
Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a
dirt road accessing to the Sumulong Highway, Antipolo, Rizal.

On September 10, 1991, the Wimbeco Builders, Inc. (WBI)

submitted its quotation for P8,649,000 to WHI for the
construction of the warehouse building on a portion of the
property with an area of 5,088 square meters.[9] WBI
proposed to start the project on October 1, 1991 and to turn
over the building to WHI on February 29, 1992.[10]

At a special meeting on May 17, 1991, the respondents Board

of Directors approved a resolution authorizing the corporation,
through its president, Roberto B. Roxas, to sell Lot No. 491-A3-B-2 covered by TCT No. 78086, with an area of 7,213 square
meters, at a price and under such terms and conditions which
he deemed most reasonable and advantageous to the
corporation; and to execute, sign and deliver the pertinent
sales documents and receive the proceeds of the sale for and
on behalf of the company.[3]

In a Letter dated September 16, 1991, Ponderosa Leather

Goods Company, Inc. confirmed its lease agreement with WHI
of a 5,000-square-meter portion of the warehouse yet to be
constructed at the rental rate of P65 per square meter.
Ponderosa emphasized the need for the warehouse to be
ready for occupancy before April 1, 1992.[11] WHI accepted
the offer. However, WBI failed to commence the construction
of the warehouse in October 1, 1991 as planned because of
the presence of squatters in the property and suggested a
renegotiation of the contract after the squatters shall have
been evicted.[12] Subsequently, the squatters were evicted
from the property.

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot

No. 491-A-3-B-2 covered by TCT No. 78086 on which it
planned to construct its warehouse building, and a portion of
the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot
container van would be able to readily enter or leave the
property. In a Letter to Roxas dated June 21, 1991, WHI
President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2
under stated terms and conditions for P1,000 per square
meter or at the price of P7,213,000.[4] One of the terms
incorporated in Dys offer was the following provision:

5. This Offer to Purchase is made on the representation and

warranty of the OWNER/SELLER, that he holds a good and
registrable title to the property, which shall be conveyed
CLEAR and FREE of all liens and encumbrances, and that the
area of 7,213 square meters of the subject property already
includes the area on which the right of way traverses from the
main lot (area) towards the exit to the Sumulong Highway as
shown in the location plan furnished by the Owner/Seller to
the buyer. Furthermore, in the event that the right of way is
insufficient for the buyers purposes (example: entry of a 45foot container), the seller agrees to sell additional square
meter from his current adjacent property to allow the buyer to
full access and full use of the property.[5]
Roxas indicated his acceptance of the offer on page 2 of the
deed. Less than a month later or on July 1, 1991, Roxas, as
President of RECCI, as vendor, and Dy, as President of WHI, as
vendee, executed a contract to sell in which RECCI bound and
obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT
No. 78086 for P7,213,000.[6] On September 5, 1991, a Deed
of Absolute Sale[7] in favor of WHI was issued, under which
Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for

On March 31, 1992, WHI and WBI executed a Letter-Contract

for the construction of the warehouse building for
P11,804,160.[13] The contractor started construction in April
1992 even before the building officials of Antipolo City issued
a building permit on May 28, 1992. After the warehouse was
finished, WHI issued on March 21, 1993 a certificate of
occupancy by the building official. Earlier, or on March 18,
1993, WHI, as lessor, and Ponderosa, as lessee, executed a
contract of lease over a portion of the property for a monthly
rental of P300,000 for a period of three years from March 1,
1993 up to February 28, 1996.[14]
In the meantime, WHI complained to Roberto Roxas that the
vehicles of RECCI were parked on a portion of the property
over which WHI had been granted a right of way. Roxas
promised to look into the matter. Dy and Roxas discussed the
need of the WHI to buy a 500-square-meter portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085 as provided for in the
deed of absolute sale. However, Roxas died soon thereafter.
On April 15, 1992, the WHI wrote the RECCI, reiterating its
verbal requests to purchase a portion of the said lot as
provided for in the deed of absolute sale, and complained
about the latters failure to eject the squatters within the
three-month period agreed upon in the said deed.
The WHI demanded that the RECCI sell a portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085 for its beneficial use
within 72 hours from notice thereof, otherwise the appropriate
action would be filed against it. RECCI rejected the demand of
WHI. WHI reiterated its demand in a Letter dated May 29,
1992. There was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI
with the Regional Trial Court of Makati, for specific
performance and damages, and alleged, inter alia, the
following in its complaint:
5. The current adjacent property referred to in the
aforequoted paragraph of the Deed of Absolute Sale pertains
to the property covered by Transfer Certificate of Title No. N78085 of the Registry of Deeds of Antipolo, Rizal, registered in
the name of herein defendant Roxas Electric.
6. Defendant Roxas Electric in patent violation of the express
and valid terms of the Deed of Absolute Sale unjustifiably
refused to deliver to Woodchild Holdings the stipulated
beneficial use and right of way consisting of 25 square meters
and 55 square meters to the prejudice of the plaintiff.
7. Similarly, in as much as the 25 square meters and 55
square meters alloted to Woodchild Holdings for its beneficial
use is inadequate as turning and/or maneuvering area of its
45-foot container van, Woodchild Holdings manifested its
intention pursuant to para. 5 of the Deed of Sale to purchase
additional square meters from Roxas Electric to allow it full
access and use of the purchased property, however, Roxas
Electric refused and failed to merit Woodchild Holdings
request contrary to defendant Roxas Electrics obligation under
the Deed of Absolute Sale (Annex A).

c) to cause annotation on Transfer Certificate of Title No. N78085 the beneficial use and right of way granted to
Woodchild Holdings under the Deed of Absolute Sale;
d) to pay Woodchild Holdings the amount of P5,660,000.00,
representing actual damages and unrealized income;
e) to pay attorneys fees in the amount of P100,000.00; and
f) to pay the costs of suit.
Other reliefs just and equitable are prayed for.[16]

In its answer to the complaint, the RECCI alleged that it never

authorized its former president, Roberto Roxas, to grant the
beneficial use of any portion of Lot No. 491-A-3-B-1, nor
agreed to sell any portion thereof or create a lien or burden
thereon. It alleged that, under the Resolution approved on
May 17, 1991, it merely authorized Roxas to sell Lot No. 491A-3-B-2 covered by TCT No. 78086. As such, the grant of a
right of way and the agreement to sell a portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085 in the said deed are
ultra vires. The RECCI further alleged that the provision
therein that it would sell a portion of Lot No. 491-A-3-B-1 to
the WHI lacked the essential elements of a binding contract.
[17]

8. Moreover, defendant, likewise, failed to eject all existing

squatters and occupants of the premises within the stipulated
time frame and as a consequence thereof, plaintiffs planned
construction has been considerably delayed for seven (7)
months due to the squatters who continue to trespass and
obstruct the subject property, thereby Woodchild Holdings
incurred substantial losses amounting to P3,560,000.00
occasioned by the increased cost of construction materials
and labor.

In its amended answer to the complaint, the RECCI alleged

that the delay in the construction of its warehouse building
was due to the failure of the WHIs contractor to secure a
building permit thereon.[18]

9. Owing further to Roxas Electrics deliberate refusal to

comply with its obligation under Annex A, Woodchild Holdings
suffered unrealized income of P300,000.00 a month or
P2,100,000.00 supposed income from rentals of the subject
property for seven (7) months.

On November 11, 1996, the trial court rendered judgment in

favor of the WHI, the decretal portion of which reads:

10. On April 15, 1992, Woodchild Holdings made a final

demand to Roxas Electric to comply with its obligations and
warranties under the Deed of Absolute Sale but
notwithstanding such demand, defendant Roxas Electric
refused and failed and continue to refuse and fail to heed
plaintiffs demand for compliance.
Copy of the demand letter dated April 15, 1992 is hereto
attached as Annex B and made an integral part hereof.
11. Finally, on 29 May 1991, Woodchild Holdings made a letter
request addressed to Roxas Electric to particularly annotate
on Transfer Certificate of Title No. N-78085 the agreement
under Annex A with respect to the beneficial use and right of
way, however, Roxas Electric unjustifiably ignored and
disregarded the same.
Copy of the letter request dated 29 May 1992 is hereto
attached as Annex C and made an integral part hereof.
12. By reason of Roxas Electrics continuous refusal and failure
to comply with Woodchild Holdings valid demand for
compliance under Annex A, the latter was constrained to
litigate, thereby incurring damages as and by way of
attorneys fees in the amount of P100,000.00 plus costs of suit
and expenses of litigation.[15]
The WHI prayed that, after due proceedings, judgment be
rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that judgment be
rendered in favor of Woodchild Holdings and ordering Roxas
Electric the following:
a) to deliver to Woodchild Holdings the beneficial use of the
stipulated 25 square meters and 55 square meters;
b) to sell to Woodchild Holdings additional 25 and 100 square
meters to allow it full access and use of the purchased
property pursuant to para. 5 of the Deed of Absolute Sale;

During the trial, Dy testified that he told Roxas that the

petitioner was buying a portion of Lot No. 491-A-3-B-1
consisting of an area of 500 square meters, for the price of
P1,000 per square meter.

WHEREFORE, judgment is hereby rendered directing

defendant:
(1) To allow plaintiff the beneficial use of the existing right of
way plus the stipulated 25 sq. m. and 55 sq. m.;
(2) To sell to plaintiff an additional area of 500 sq. m. priced at
P1,000 per sq. m. to allow said plaintiff full access and use of
the purchased property pursuant to Par. 5 of their Deed of
Absolute Sale;
(3) To cause annotation on TCT No. N-78085 the beneficial use
and right of way granted by their Deed of Absolute Sale;
(4) To pay plaintiff the amount of P5,568,000 representing
actual damages and plaintiffs unrealized income;
(5) To pay plaintiff P100,000 representing attorneys fees; and
To pay the costs of suit.
SO ORDERED.[19]
The trial court ruled that the RECCI was estopped from
disowning the apparent authority of Roxas under the May 17,
1991 Resolution of its Board of Directors. The court reasoned
that to do so would prejudice the WHI which transacted with
Roxas in good faith, believing that he had the authority to
bind the WHI relating to the easement of right of way, as well
as the right to purchase a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085.
The RECCI appealed the decision to the CA, which rendered a
decision on November 9, 1999 reversing that of the trial court,
and ordering the dismissal of the complaint. The CA ruled
that, under the resolution of the Board of Directors of the
RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B2 covered by TCT No. 78086, but not to grant right of way in
favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to
grant an option to the petitioner to buy a portion thereof. The
appellate court also ruled that the grant of a right of way and
an option to the respondent were so lopsided in favor of the
respondent because the latter was authorized to fix the
location as well as the price of the portion of its property to be

sold to the respondent. Hence, such provisions contained in

the deed of absolute sale were not binding on the RECCI. The
appellate court ruled that the delay in the construction of
WHIs warehouse was due to its fault.

respondent is obliged to sell a portion of Lot No. 491-A-3-B-1

covered by TCT No. 78085 with an area of 500 square meters
at the price of P1,000 per square meter, based on its evidence
and Articles 649 and 651 of the New Civil Code.

The Present Petition

For its part, the respondent posits that Roxas was not so
authorized under the May 17, 1991 Resolution of its Board of
Directors to impose a burden or to grant a right of way in
favor of the petitioner on Lot No. 491-A-3-B-1, much less
convey a portion thereof to the petitioner. Hence, the
respondent was not bound by such provisions contained in the
deed of absolute sale. Besides, the respondent contends, the
petitioner cannot enforce its right to buy a portion of the said
property since there was no agreement in the deed of
absolute sale on the price thereof as well as the specific
portion and area to be purchased by the petitioner.

The petitioner now comes to this Court asserting that:

I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED
OF ABSOLUTE SALE (EXH. C) IS ULTRA VIRES.
II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
RULING OF THE COURT A QUO ALLOWING THE PLAINTIFFAPPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF
WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55
SQUARE METERS BECAUSE THESE ARE VALID STIPULATIONS
AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE
(EXH. C).
III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT
OF APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED
OF ABSOLUTE SALE (EXH. C) WERE DISADVANTAGEOUS TO
THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS
PROPERTY WITHOUT DUE PROCESS.
IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF
PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED
DECISION.
V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE
OF THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND
AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. C).
VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE
RULING OF THE COURT A QUO DIRECTING THE DEFENDANT
TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00
REPRESENTING ACTUAL DAMAGES AND PLAINTIFFS
UNREALIZED INCOME AS WELL AS ATTORNEYS FEES.[20]

The threshold issues for resolution are the following: (a)

whether the respondent is bound by the provisions in the
deed of absolute sale granting to the petitioner beneficial use
and a right of way over a portion of Lot
No. 491-A-3-B-1 accessing to the Sumulong Highway and
granting the option to the petitioner to buy a portion thereof,
and, if so, whether such agreement is enforceable against the
respondent; (b) whether the respondent failed to eject the
squatters on its property within two weeks from the execution
of the deed of absolute sale; and, (c) whether the respondent
is liable to the petitioner for damages.
On the first issue, the petitioner avers that, under its
Resolution of May 17, 1991, the respondent authorized Roxas,
then its president, to grant a right of way over a portion of Lot
No. 491-A-3-B-1 in favor of the petitioner, and an option for
the respondent to buy a portion of the said property. The
petitioner contends that when the respondent sold Lot No.
491-A-3-B-2 covered by TCT No. 78086, it (respondent) was
well aware of its obligation to provide the petitioner with a
means of ingress to or egress from the property to the
Sumulong Highway, since the latter had no adequate outlet to
the public highway. The petitioner asserts that it agreed to
buy the property covered by TCT No. 78085 because of the
grant by the respondent of a right of way and an option in its
favor to buy a portion of the property covered by TCT No.
78085. It contends that the respondent never objected to
Roxas acceptance of its offer to purchase the property and the
terms and conditions therein; the respondent even allowed
Roxas to execute the deed of absolute sale in its behalf. The
petitioner asserts that the respondent even received the
purchase price of the property without any objection to the
terms and conditions of the said deed of sale. The petitioner
claims that it acted in good faith, and contends that after
having been benefited by the said sale, the respondent is
estopped from assailing its terms and conditions. The
petitioner notes that the respondents Board of Directors never
approved any resolution rejecting the deed of absolute sale
executed by Roxas for and in its behalf. As such, the

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of
Appeals,[21] we held that:
A corporation is a juridical person separate and distinct from
its stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members
and may not be sold by the stockholders or members without
express authorization from the corporations board of
directors. Section 23 of BP 68, otherwise known as the
Corporation Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock,
from among the members of the corporation, who shall hold
office for one (1) year and until their successors are elected
and qualified.
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its by-laws or by its
board resolution, through its officers or agents in the normal
course of business. The general principles of agency govern
the relation between the corporation and its officers or
agents, subject to the articles of incorporation, by-laws, or
relevant provisions of law. [22]
Generally, the acts of the corporate officers within the scope
of their authority are binding on the corporation. However,
under Article 1910 of the New Civil Code, acts done by such
officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly,
or is estopped from denying them:
Art. 1910. The principal must comply with all the obligations
which the agent may have contracted within the scope of his
authority.
As for any obligation wherein the agent has exceeded his
power, the principal is not bound except when he ratifies it
expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the
scope of authority are unenforceable against the corporation
unless ratified by the corporation.[23]
In BA Finance Corporation v. Court of Appeals,[24] we also
ruled that persons dealing with an assumed agency, whether
the assumed agency be a general or special one, are bound at
their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of
proof is upon them to establish it.
In this case, the respondent denied authorizing its then
president Roberto B. Roxas to sell a portion of Lot No. 491-A-3B-1 covered by TCT No. 78085, and to create a lien or burden
thereon. The petitioner was thus burdened to prove that the
respondent so authorized Roxas to sell the same and to create
a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of
the Board of Directors of the respondent, which is worded as
follows:
RESOLVED, as it is hereby resolved, that the corporation, thru
the President, sell to any interested buyer, its 7,213-sq.-meter

property at the Sumulong Highway, Antipolo, Rizal, covered

by Transfer Certificate of Title No. N-78086, at a price and on
terms and conditions which he deems most reasonable and
advantageous to the corporation;
FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of
the corporation, be, as he is hereby authorized to execute,
sign and deliver the pertinent sales documents and receive
the proceeds of sale for and on behalf of the company.[25]

Evidently, Roxas was not specifically authorized under the

said resolution to grant a right of way in favor of the petitioner
on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the
petitioner a portion thereof. The authority of Roxas, under the
resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No.
78086 did not include the authority to sell a portion of the
adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real
rights thereon. Neither may such authority be implied from
the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to
the petitioner on such terms and conditions which he deems
most reasonable and advantageous. Under paragraph 12,
Article 1878 of the New Civil Code, a special power of attorney
is required to convey real rights over immovable property.[26]
Article 1358 of the New Civil Code requires that contracts
which have for their object the creation of real rights over
immovable property must appear in a public document.[27]
The petitioner cannot feign ignorance of the need for Roxas to
have been specifically authorized in writing by the Board of
Directors to be able to validly grant a right of way and agree
to sell a portion of Lot No. 491-A-3-B-1. The rule is that if the
act of the agent is one which requires authority in writing,
those dealing with him are charged with notice of that fact.
[28]
Powers of attorney are generally construed strictly and courts
will not infer or presume broad powers from deeds which do
not sufficiently include property or subject under which the
agent is to deal.[29] The general rule is
that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside
it. The act done must be legally identical with that authorized
to be done.[30] In sum, then, the consent of the respondent to
the assailed provisions in the deed of absolute sale was not
obtained; hence, the assailed provisions are not binding on it.
We reject the petitioners submission that, in allowing Roxas to
execute the contract to sell and the deed of absolute sale and
failing to reject or disapprove the same, the respondent
thereby gave him apparent authority to grant a right of way
over Lot No. 491-A-3-B-1 and to grant an option for the
respondent to sell a portion thereof to the petitioner. Absent
estoppel or ratification, apparent authority cannot remedy the
lack of the written power required under the statement of
frauds.[31] In addition, the petitioners fallacy is its wrong
assumption of the unproved premise that the respondent had
full knowledge of all the terms and conditions contained in the
deed of absolute sale when Roxas executed it.
It bears stressing that apparent authority is based on estoppel
and can arise from two instances: first, the principal may
knowingly permit the agent to so hold himself out as having
such authority, and in this way, the principal becomes
estopped to claim that the agent does not have such
authority; second, the principal may so clothe the agent with
the indicia of authority as to lead a reasonably prudent person
to believe that he actually has such authority.[32] There can
be no apparent authority of an agent without acts or conduct
on the part of the principal and such acts or conduct of the
principal must have been known and relied upon in good faith
and as a result of the exercise of reasonable prudence by a
third person as claimant and such must have produced a
change of position to its detriment. The apparent power of an
agent is to be determined by the acts of the principal and not
by the acts of the agent.[33]
For the principle of apparent authority to apply, the petitioner
was burdened to prove the following: (a) the acts of the
respondent justifying belief in the agency by the petitioner;
(b) knowledge thereof by the respondent which is sought to
be held; and, (c) reliance thereon by the petitioner consistent
with ordinary care and prudence.[34] In this case, there is no
evidence on record of specific acts made by the
respondent[35] showing or indicating that it had full
knowledge of any representations made by Roxas to the
petitioner that the respondent had authorized him to grant to
the respondent an option to buy a portion of Lot No. 491-A-3B-1 covered by TCT No. 78085, or to create a burden or lien
thereon, or that the respondent allowed him to do so.

The petitioners contention that by receiving and retaining the

P5,000,000 purchase price of Lot No. 491-A-3-B-2, the
respondent effectively and impliedly ratified the grant of a
right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to
grant to the petitioner an option to sell a portion thereof, is
barren of merit. It bears stressing that the respondent sold Lot
No. 491-A-3-B-2 to the petitioner, and the latter had taken
possession of the property. As such, the respondent had the
right to retain the P5,000,000, the purchase price of the
property it had sold to the petitioner. For an act of the
principal to be considered as an implied ratification of an
unauthorized act of an agent, such act must be inconsistent
with any other hypothesis than that he approved and
intended to adopt what had been done in his name.[36]
Ratification is based on waiver the intentional relinquishment
of a known right. Ratification cannot be inferred from acts that
a principal has a right to do independently of the unauthorized
act of the agent. Moreover, if a writing is required to grant an
authority to do a particular act, ratification of that act must
also be in writing.[37] Since the respondent had not ratified
the unauthorized acts of Roxas, the same are unenforceable.
[38] Hence, by the respondents retention of the amount, it
cannot thereby be implied that it had ratified the
unauthorized acts of its agent, Roberto Roxas.
On the last issue, the petitioner contends that the CA erred in
dismissing its complaint for damages against the respondent
on its finding that the delay in the construction of its
warehouse was due to its (petitioners) fault. The petitioner
asserts that the CA should have affirmed the ruling of the trial
court that the respondent failed to cause the eviction of the
squatters from the property on or before September 29, 1991;
hence, was liable for P5,660,000. The respondent, for its part,
asserts that the delay in the construction of the petitioners
warehouse was due to its late filing of an application for a
building permit, only on May 28, 1992.
The petitioners contention is meritorious. The respondent
does not deny that it failed to cause the eviction of the
squatters on or before September 29, 1991. Indeed, the
respondent does not deny the fact that when the petitioner
wrote the respondent demanding that the latter cause the
eviction of the squatters on April 15, 1992, the latter were still
in the premises. It was only after receiving the said letter in
April 1992 that the respondent caused the eviction of the
squatters, which thus cleared the way for the petitioners
contractor to commence the construction of its warehouse
and secure the appropriate building permit therefor.
The petitioner could not be expected to file its application for
a building permit before April 1992 because the squatters
were still occupying the property. Because of the respondents
failure to cause their eviction as agreed upon, the petitioners
contractor failed to commence the construction of the
warehouse in October 1991 for the agreed price of
P8,649,000. In the meantime, costs of construction materials
spiraled. Under the construction contract entered into
between the petitioner and the contractor, the petitioner was
obliged to pay P11,804,160,[39] including the additional work
costing P1,441,500, or a net increase of P1,712,980.[40] The
respondent is liable for the difference between the original
cost of construction and the increase thereon, conformably to
Article 1170 of the New Civil Code, which reads:

Art. 1170. Those who in the performance of their obligations

are guilty of fraud, negligence, or delay and those who in any
manner contravene the tenor thereof, are liable for damages.
The petitioner, likewise, lost the amount of P3,900,000 by way
of unearned income from the lease of the property to the
Ponderosa Leather Goods Company. The respondent is, thus,
liable to the petitioner for the said amount, under Articles
2200 and 2201 of the New Civil Code:
Art. 2200. Indemnification for damages shall comprehend not
only the value of the loss suffered, but also that of the profits
which the obligee failed to obtain.
Art. 2201. In contracts and quasi-contracts, the damages for
which the obligor who acted in good faith is liable shall be
those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation
was constituted.
In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be

reasonably attributed to the non-performance of the

obligation.

In sum, we affirm the trial courts award of damages and

attorneys fees to the petitioner.
IN LIGHT OF ALL THE FOREGOING, judgment is hereby
rendered AFFIRMING the assailed Decision of the Court of
Appeals WITH MODIFICATION. The respondent is ordered to
pay to the petitioner the amount of P5,612,980 by way of
actual damages and P100,000 by way of attorneys fees. No
costs.
SO ORDERED.

ROMEO J. CALLEJO, SR.

Associate Justice
WE CONCUR:

REYNATO S. PUNO
Associate Justice
Chairman

MA. ALICIA AUSTRIA-MARTINEZ DANTE O. TINGA

Associate Justice Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were

reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

REYNATO S. PUNO
Associate Justice
Chairman, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the

Division Chairmans Attestation, it is hereby certified that the
conclusions in the above decision were reached in
consultation before the case was assigned to the writer of the
opinion of the Courts Division.

FIRST DIVISION
[G.R. No. 117847. October 7, 1998]
PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner,
vs. COURT OF APPEALS and STEFANI SAO, respondents.
DECISION
PANGANIBAN, J.:
Contracts entered into by a corporate president without
express prior board approval bind the corporation, when such
officers apparent authority is established and when these
contracts are ratified by the corporation.
The Case
This principle is stressed by the Court in rejecting the Petition
for Review of the February 28, 1994 Decision and the October
28, 1994 Resolution of the Court of Appeals in CA-GR CV No.
30670.
In a collection case[1] filed by Stefani Sao against Peoples
Aircargo and Warehousing Co., Inc., the Regional Trial Court
(RTC) of Pasay City, Branch 110, rendered a Decision[2] dated
October 26, 1990, the dispositive portion of which reads:[3]
WHEREFORE, in light of all the foregoing, judgment is hereby
rendered, ordering [petitioner] to pay [private respondent] the
amount of sixty thousand (P60,000.00) pesos representing
payment of [private respondents] services in preparing the
manual of operations and in the conduct of a seminar for
[petitioner]. The Counterclaim is hereby dismissed.
Aggrieved by what he considered a minuscule award of
P60,000, private respondent appealed to the Court of
Appeals[4] (CA) which, in its Decision promulgated February
28, 1994, granted his prayer for P400,000, as follows:[5]
WHEREFORE, PREMISES CONSIDERED, the appealed judgment
is hereby MODIFIED in that [petitioner] is ordered to pay
[private respondent] the amount of four hundred thousand
pesos (P400,000.00) representing payment of [private
respondents] services in preparing the manual of operations
and in the conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of
the above-mentioned Decision was denied in the Resolution
promulgated on October 28, 1994.
The Facts
Petitioner is a domestic corporation, which was organized in
the middle of 1986 to operate a customs bonded warehouse
at the old Manila International Airport in Pasay City.[6]
To obtain a license for the corporation from the Bureau of
Customs, Antonio Punsalan Jr., the corporation president,
solicited a proposal from private respondent for the
preparation of a feasibility study.[7] Private respondent
submitted a letter-proposal dated October 17, 1986 (First
Contract hereafter) to Punsalan, which is reproduced
hereunder:[8]
Dear Mr. Punsalan:
With reference to your request for professional engineering
consultancy services for your proposed MIA Warehousing
Project may we offer the following outputs and the
corresponding rate and terms of agreement:
===========================
=========
Project Feasibility Study consisting of
Market Study

Fifty percent (50%) .upon confirmation of the agreement

Twenty-five percent (25%)..15 days after the confirmation of
the agreement
Twenty-five percent (25%)..upon submission of the specified
outputs
The outputs will be completed and submitted within 30 days
upon confirmation of the agreement and receipt by us of the
first fifty percent payment.
-------------------------------------------------------------------------------------------Thank you.
Yours truly, CONFORME:
(S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.
(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.
Consultant for President, PAIRCARGO
Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner,
objected to private respondents offer, as another company
priced a similar proposal at only P15,000.[9] However,
Punsalan preferred private respondents services because of
the latters membership in the task force, which was
supervising the transition of the Bureau of Customs from the
Marcos government to the Aquino administration.[10]
On October 17, 1986, petitioner, through Punsalan, sent
private respondent a letter, confirming their agreement as
follows:
Dear Mr. Sao:
With regard to the services offered by your company in your
letter dated 13 October 1986, for the preparation of the
necessary study and documentations to support our
Application for Authority to Operate a public Customs Bonded
Warehouse located at the old MIA Compound in Pasay City,
please be informed that our company is willing to hire your
services and will pay the amount of THREE HUNDRED FIFTY
THOUSAND PESOS (P350,000.00) as follows:
P100,000.00 - upon signing of the agreement;
150,000.00 - on or before October 31, 1986, with the
favorable Recommendation of the CBW on our application.
100,000.00 - upon receipt of the study in final form.
Very truly yours,
(S)ANTONIO C. PUNSALAN
(T)ANTONIO C. PUNSALAN
President
CONFORME & RECEIVED from PAIRCARGO, the
amount of ONE HUNDRED THOUSAND PESOS
(P100,000.00), this 17th day of October,
1986 as 1st installment payment of the
service agreement dated October 13, 1986.
(S)STEFANI C. SAO
(T)STEFANI C. SAO
Accordingly, private respondent prepared a feasibility study
for petitioner which eventually paid him the balance of the
contract price, although not according to the schedule agreed
upon.[11]

Technical Study

On December 4, 1986, upon Punsalans request, private

respondent sent petitioner another letter-proposal (Second
Contract hereafter), which reads:

Financial Feasibility Study

Peoples Air Cargo & Warehousing Co., Inc.

Preparation of pertinent documentation requirements for the

application

Old MIA Compound, Metro Manila

=====================================
================
The above services will be provided for a fee of [p]esos
350,000.00 payable according to the following schedule:
=====================================
================

Attention: Mr. ANTONIO PUN[S]ALAN, JR.

President
Dear Mr. Pun[s]alan:
This is to formalize our proposal for consultancy services to
your company the scope of which is defined in the attached
service description.

The total service you have decided to avail xxx would be

available upon signing of the conforme below and would come
[in] the amount of FOUR HUNDRED THOUSAND PESOS
(P400,000.00) payable at the schedule defined as follows
(with the balance covered by post-dated cheques):
Downpayment upon signing conforme . . . P80,000.00
15 January 1987 . . . . . . . . . . . . . 53,333.00
30 January 1987 . . . . . . . . . . . . . 53,333.00
15 February 1987 . . . . . . . . . . . . . 53,333.00
28 February 1987 . . . . . . . . . . . . . 53,333.00
15 March1987 . . . . . . . . . . . . . 53,333.00
30 March 1987 . . . . . . . . . . . . . 53,333.00
With this package, you are assured of the highest service
quality as our performance record shows we always deliver no
less.
Thank you very much.
Yours truly,
(S)STEFANI C. SAO
(T)STEFANI C. SAO
Industrial Engineering Consultant
CONFORME:
(S)ANTONIO C. PUNSALAN JR.
(T)PAIRCARGO CO. INC.
During the trial, the lower court observed that the Second
Contract bore, at the lower right portion of the letter, the
following notations in pencil:
1. Operations Manual
2. Seminar/workshop for your employees
P400,000 - package deal
50% upon completion of seminar/workshop
50% upon approval by the Commissioner
The Manual has already been approved by the Commissioner
but payment has not yet been made."
The lower left corner of the letter also contained the following
notations:
1st letter - 4 Dec. 1986
2nd letter - 15 June 1987 with
Hinanakit.
On January 10, 1987, Andy Villaceren, vice president of
petitioner, received the operations manual prepared by
private respondent.[12] Petitioner submitted said operations
manual to the Bureau of Customs in connection with the
formers application to operate a bonded warehouse;
thereafter, in May 1987, the Bureau issued to it a license to
operate, enabling it to become one of the three public
customs bonded warehouses at the international airport.[13]
Private respondent also conducted, in the third week of
January 1987 in the warehouse of petitioner, a three-day
training seminar for the latters employees.[14]
On March 25, 1987, private respondent joined the Bureau of
Customs as special assistant to then Commissioner Alex
Padilla, a position he held until he became technical assistant
to then Commissioner Miriam Defensor-Santiago on March 7,
1988.[15] Meanwhile, Punsalan sold his shares in petitionercorporation and resigned as its president in 1987.[16]
On February 9, 1988, private respondent filed a collection suit
against petitioner. He alleged that he had prepared an
operations manual for petitioner, conducted a seminarworkshop for its employees and delivered to it a computer
program; but that, despite demand, petitioner refused to pay
him for his services.

Petitioner, in its answer, denied that private respondent had

prepared an operations manual and a computer program or
conducted a seminar-workshop for its employees. It further
alleged that the letter-agreement was signed by Punsalan
without authority, in collusion with [private respondent] in
order to unlawfully get some money from [petitioner], and
despite his knowledge that a group of employees of the
company had been commissioned by the board of directors to
prepare an operations manual.[17]
The trial court declared the Second Contract unenforceable or
simulated. However, since private respondent had actually
prepared the operations manual and conducted a training
seminar for petitioner and its employees, the trial court
awarded P60,000 to the former, on the ground that no one
should be unjustly enriched at the expense of another (Article
2142, Civil Code). The trial court determined the amount in
light of the evidence presented by defendant on the usual
charges made by a leading consultancy firm on similar
services.[18]
The Ruling of the Court of Appeals
To Respondent Court, the pivotal issue of private respondents
appeal was the enforceability of the Second Contract. It noted
that petitioner did not appeal the Decision of the trial court,
implying that it had agreed to pay the P60,000 award. If the
contract was valid and enforceable, then petitioner should be
held liable for the full amount stated therein, not P60,000 as
held by the lower court.
Rejecting the finding of the trial court that the December 4,
1986 contract was simulated or unenforceable, the CA ruled in
favor of its validity and enforceability. According to the Court
of Appeals, the evidence on record shows that the president
of petitioner-corporation had entered into the First Contract,
which was similar to the Second Contract. Thus, petitioner had
clothed its president with apparent authority to enter into the
disputed agreement. As it had also become the practice of the
petitioner-corporation to allow its president to negotiate and
execute contracts necessary to secure its license as a
customs bonded warehouse without prior board approval, the
board itself, by its acts and through acquiescence, practically
laid aside the normal requirement of prior express approval.
The Second Contract was declared valid and binding on the
petitioner, which was held liable to private respondent in the
full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before
us.[19]
The Issues
Instead of alleging reversible errors, petitioner imputes grave
abuse of discretion to the Court of Appeals, viz.:[20]
I. xxx [I]n ruling that the subject letter-agreement for services
was binding on the corporation simply because it was entered
into by its president[;]
II. xxx [I]n ruling that the subject letter-agreement for services
was binding on the corporation notwithstanding the lack of
any board authority since it was the purported practice to
allow the president to enter into contracts of said nature
(citing one previous instance of a similar contract)[;] and
III. xxx [I]n ruling that the subject letter-agreement for
services was a valid contract and not merely simulated."
The Court will overlook the lapse of petitioner in alleging
grave abuse of discretion as its ground for seeking a reversal
of the assailed Decision. Although the Rules of Court specify
reversible errors as grounds for a petition for review under
Rule 45, the Court will lay aside for the nonce this procedural
lapse and consider the allegations of grave abuse as
statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the
amount of such accountability. Hence, the resolution of this
petition rests on the sole issue of the enforceability and
validity of the Second Contract, more specifically: (1) whether
the president of the petitioner-corporation had apparent
authority to bind petitioner to the Second Contract; and (2)
whether the said contract was valid and not merely simulated.
The Courts Ruling
The petition is not meritorious.
First Issue: Apparent Authority of a Corporate President

Petitioner argues that the disputed contract is unenforceable,

because Punsalan, its president, was not authorized by its
board of directors to enter into said contract.
The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly
bind a corporation.[21] A corporation is a juridical person,
separate and distinct from its stockholders and members,
having xxx powers, attributes and properties expressly
authorized by law or incident to its existence.[22]
Being a juridical entity, a corporation may act through its
board of directors, which exercises almost all corporate
powers, lays down all corporate business policies and is
responsible for the efficiency of management,[23] as provided
in Section 23 of the Corporation Code of the Philippines:
SEC. 23. The Board of Directors or Trustees. -- Unless
otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees x x x.
Under this provision, the power and the responsibility to
decide whether the corporation should enter into a contract
that will bind the corporation is lodged in the board, subject to
the articles of incorporation, bylaws, or relevant provisions of
law.[24] However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of
such individuals to bind the corporation is generally derived
from law, corporate bylaws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence
in the general course of business, viz.: [25]
A corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent
that [the] authority to do so has been conferred upon him,
and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom
and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has
caused persons dealing with the officer or agent to believe
that it has conferred.
Accordingly, the appellate court ruled in this case that the
authority to act for and to bind a corporation may be
presumed from acts of recognition in other instances, wherein
the power was in fact exercised without any objection from its
board or shareholders. Petitioner had previously allowed its
president to enter into the First Contract with private
respondent without a board resolution expressly authorizing
him; thus, it had clothed its president with apparent authority
to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement
prior to the subject contract does not constitute corporate
practice, which Webster defines as frequent or customary
action. It cites Board of Liquidators v. Kalaw,[26] in which the
practice of NACOCO allowing its general manager to negotiate
and execute contract in its copra trading activities for and on
its behalf, without prior board approval, was inferred from
sixty contracts not one, as in the present case -- previously
entered into by the corporation without such board resolution.
Petitioners argument is not persuasive. Apparent authority is
derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power
to act or, in other words, the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in
his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his
ordinary powers.[27] It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of other
parties.[28] It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio
Punsalan Jr., entered into the First Contract without first
securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus
clothing its president with the power to bind the corporation.
The grant of apparent authority to Punsalan is evident in the
testimony of Yong -- senior vice president, treasurer and major
stockholder of petitioner. Testifying on the First Contract, he
said:[29]

A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr.

Sao is very influential with the Collector of Customs[s].
Because the Collector of Custom[s] will be the one to approve
our project study and I objected to that, sir. And I said it [was
an exorbitant] price. And Mr. Punsalan he is the [p]resident, so
he [gets] his way.
Q: And so did the company eventually pay this P350,000.00 to
Mr. Sao?
A: Yes, sir.
The First Contract was consummated, implemented and paid
without a hitch.
Hence, private respondent should not be faulted for believing
that Punsalans conformity to the contract in dispute was also
binding on petitioner. It is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other
agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do
those acts; and thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be
estopped from denying the agents authority.[30]
Furthermore, private respondent prepared an operations
manual and conducted a seminar for the employees of
petitioner in accordance with their contract. Petitioner
accepted the operations manual, submitted it to the Bureau of
Customs and allowed the seminar for its employees. As a
result of its aforementioned actions, petitioner was given by
the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract
was outside the usual powers of the president, petitioners
ratification of said contract and acceptance of benefits have
made it binding, nonetheless. The enforceability of contracts
under Article 1403(2) is ratified by the acceptance of benefits
under them under Article 1405.
Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict
rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such
officer has certain limited powers in the transaction of the
usual and ordinary business of the corporation.[31] In the
absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the
domain of the general objectives of its business and within the
scope of his or her usual duties.[32]
Hence, it has been held in other jurisdictions that the
president of a corporation possesses the power to enter into a
contract for the corporation, when the conduct on the part of
both the president and the corporation [shows] that he had
been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act
and had recognized, approved and ratified his former and
similar actions.[33] Furthermore, a party dealing with the
president of a corporation is entitled to assume that he has
the authority to enter, on behalf of the corporation, into
contracts that are within the scope of the powers of said
corporation and that do not violate any statute or rule on
public policy.[34]
Second Issue: Alleged Simulation of the First Contract
As an alternative position, petitioner seeks to pare down its
liabilities by limiting its exposure from P400,000 to only
P60,000, the amount awarded by the RTC. Petitioner
capitalizes on the badges of fraud cited by the trial court in
declaring said contract either simulated or unenforceable,
viz.:
xxx The October 1986 transaction with [private respondent]
involved P350,000. The same was embodied in a letter which
bore therein not only the conformity of [petitioners] then
President Punsalan but also drew a letter-confirmation from
the latter for, indeed, he was clothed with authority to enter
into the contract after the same was brought to the attention
and consideration of [petitioner]. Not only that, a [down
payment] was made. In the alleged agreement of December
4, 1986 subject of the present case, the amount is even
bigger-P400,000.00. Yet, the alleged letter-agreement drew no
letter of confirmation. And no [down payment] and postdated
checks were given. Until the filing of the present case in
February 1988, no written demand for payment was sent to
[petitioner]. [Private respondents] claim that he sent one in
writing, and one was sent by his counsel who manifested that
[h]e was looking for a copy in [his] files fails in light of his
failure to present any such copy. These and the following
considerations, to wit:

1) Despite the fact that no [down payment] and/or postdated

checks [partial payments] (as purportedly stipulated in the
alleged contract) [was given, private respondent] went ahead
with the services[;]

the contrary, the legal presumption is always on the validity of

contracts. A corporation, by accepting benefits of a
transaction entered into without authority, has ratified the
agreement and is, therefore, bound by it.[43]

2) [There was a delay in the filing of the present suit, more

than a year after [private respondent] allegedly completed his
services or eight months after the alleged last verbal demand
for payment made on Punsalan in June 1987;

WHEREFORE, the petition is hereby DENIED and the assailed

Decision AFFIRMED. Costs against petitioner.

3) Does not Punsalans writing allegedly in June 1987 on the

alleged letter-agreement of your employees[,] when it should
have been our employees, as he was then still connected with
[petitioner], indicate that the letter-agreement was signed by
Punsalan when he was no longer connected with [petitioner]
or, as claimed by [petitioner], that Punsalan signed it without
[petitioners] authority and must have been done in collusion
with plaintiff in order to unlawfully get some money from
[petitioner]?

Davide, Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ.,

concur.

4) If, as [private respondent] claims, the letter was returned

by Punsalan after affixing thereon his conformity, how come
xxx when Punsalan allegedly visited [private respondent] in
his office at the Bureau of Customs, in June 1987, Punsalan
brought (again?) the letter (with the pencil [notation] at the
left bottom portion allegedly already written)?
5) How come xxx [private respondent] did not even keep a
copy of the alleged service contract allegedly attached to the
letter-agreement?
6) Was not the letter-agreement a mere draft, it bearing the
corrections made by Punsalan of his name (the letter n is
inserted before the last letter o in Antonio) and of the spelling
of his family name (Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the case?
The issue of whether the contract is simulated or real is
factual in nature, and the Court eschews factual examination
in a petition for review under Rule 45 of the Rules of Court.
[35] This rule, however, admits of exceptions, one of which is
a conflict between the factual findings of the lower and of the
appellate courts[36] as in the case at bar.
After judicious deliberation, the Court agrees with the
appellate court that the alleged badges of fraud mentioned
earlier have not affected in any manner the perfection of the
Second Contract or proved the alleged simulation thereof.
First, the lack of payment (whether down, partial or full
payment), even after completion of private respondents
obligations, imports only a defect in the performance of the
contract on the part of petitioner. Second, the delay in the
filing of action was not fatal to private respondents cause.
Despite the lapse of one year after private respondent
completed his services or eight months after the alleged last
demand for payment in June 1987, the action was still filed
within the allowable period, considering that an action based
on a written contract prescribes only after ten years from the
time the right of action accrues.[37] Third, a misspelling in the
contract does not establish vitiation of consent, cause or
object of the contract. Fourth, a confirmation letter is not an
essential element of a contract; neither is it necessary to
perfect one. Fifth, private respondents failure to implead the
corporate president does not establish collusion between
them. Petitioner could have easily filed a third-party claim
against Punsalan if it believed that it had recourse against the
latter. Lastly, the mere fact that the contract price was six
times the alleged going rate does not invalidate it.[38] In
short, these badges do not establish simulation of said
contract.
A fictitious and simulated agreement lacks consent which is
essential to a valid and enforceable contract.[39] A contract is
simulated if the parties do not intend to be bound at all
(absolutely simulated),[40] or if the parties conceal their true
agreement (relatively simulated).[41] In the case at bar,
petitioner received from private respondent a letter-offer
containing the terms of the former, including a stipulation of
the consideration for the latters services. Punsalans
conformity, as well as the receipt and use of the operations
manual, shows petitioners consent to or, at the very least,
ratification of the contract. To repeat, petitioner even
submitted the manual to the Bureau of Customs and allowed
private respondent to conduct the seminar for its employees.
Private respondent heard no objection from the petitioner,
until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal
factors in the determination of the will of the contracting
parties.[42] The circumstances outlined above do not
establish any intention to simulate the contract in dispute. On

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 80599

September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,

vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own
behalf and as Vice-President for Sales of Mover Enterprises,
Inc., respondents.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.

REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of
respondent Court of Appeals, promulgated on September 8,
1987, which reversed the decision of the trial Court 2
dismissing the complaint for consignation filed by therein
plaintiff Ricardo S. Santos, Jr.
The parties are substantially agreed on the following facts as
found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president
of Mover Enterprises, Inc. in-charge of marketing and sales;
and the president of the said corporation was Atty. Oscar Z.
Benares. On April 30, 1980, Atty. Benares, in accommodation
of his clients, the spouses Jaime and Clarita Ong, issued Check
No. 093553 drawn against Traders Royal Bank, dated June 14,
1980, in the amount of P45,000.00 (Exh- 'I') payable to
defendant Ernestina Crisologo-Jose. Since the check was
under the account of Mover Enterprises, Inc., the same was to
be signed by its president, Atty. Oscar Z. Benares, and the
treasurer of the said corporation. However, since at that time,
the treasurer of Mover Enterprises was not available, Atty.
Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to
sign the aforesaid chEck as an alternate story. Plaintiff Ricardo
S. Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant
Ernestina Crisologo-Jose in consideration of the waiver or
quitclaim by said defendant over a certain property which the
Government Service Insurance System (GSIS) agreed to sell to
the clients of Atty. Oscar Benares, the spouses Jaime and
Clarita Ong, with the understanding that upon approval by the
GSIS of the compromise agreement with the spouses Ong, the
check will be encashed accordingly. However, since the
compromise agreement was not approved within the expected
period of time, the aforesaid check for P45,000.00 (Exh. '1')
was replaced by Atty. Benares with another Traders Royal
Bank cheek bearing No. 379299 dated August 10, 1980, in the
same amount of P45,000.00 (Exhs. 'A' and '2'), also payable
to the defendant Jose. This replacement check was also
signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S.
Santos, Jr. When defendant deposited this replacement check
(Exhs. 'A' and '2') with her account at Family Savings Bank,
Mayon Branch, it was dishonored for insufficiency of funds. A
subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence,
defendant through counsel was constrained to file a criminal
complaint for violation of Batas Pambansa Blg. 22 with the
Quezon City Fiscal's Office against Atty. Oscar Z. Benares and
plaintiff Ricardo S. Santos, Jr. The investigating Assistant City
Fiscal, Alfonso Llamas, accordingly filed an amended
information with the court charging both Oscar Benares and
Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22
docketed as Criminal Case No. Q-14867 of then Court of First
Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the
criminal charge against Benares and the plaintiff herein,
before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo
S. Santos, Jr. tendered cashier's check No. CC 160152 for
P45,000.00 dated April 10, 1981 to the defendant Ernestina
Crisologo-Jose, the complainant in that criminal case. The
defendant refused to receive the cashier's check in payment
of the dishonored check in the amount of P45,000.00. Hence,
plaintiff encashed the aforesaid cashier's check and
subsequently deposited said amount of P45,000.00 with the
Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E').
Incidentally, the cashier's check adverted to above was

purchased by Atty. Oscar Z. Benares and given to the plaintiff

herein to be applied in payment of the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded
to believe that consignation referred to in Article 1256 of the
Civil Code is applicable to this case," rendered judgment
dismissing plaintiff s complaint and defendant's counterclaim.
4
As earlier stated, respondent court reversed and set aside
said judgment of dismissal and revived the complaint for
consignation, directing the trial court to give due course
thereto.
Hence, the instant petition, the assignment of errors wherein
are prefatorily stated and discussed seriatim.
1.
Petitioner contends that respondent Court of Appeals
erred in holding that private respondent, one of the
signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under the
Negotiable Instruments Law and a debtor of petitioner to the
extent of the amount of said check.
Petitioner avers that the accommodation party in this case is
Mover Enterprises, Inc. and not private respondent who
merely signed the check in question in a representative
capacity, that is, as vice-president of said corporation, hence
he is not liable thereon under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for
the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
Consequently, to be considered an accommodation party, a
person must (1) be a party to the instrument, signing as
maker, drawer, acceptor, or indorser, (2) not receive value
therefor, and (3) sign for the purpose of lending his name for
the credit of some other person.
Based on the foregoing requisites, it is not a valid defense
that the accommodation party did not receive any valuable
consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary
concept of a debtor therein in the sense that he has not
received any valuable consideration for the instrument he
signs. Nevertheless, he is liable to a holder for value as if the
contract was not for accommodation 5 in whatever capacity
such accommodation party signed the instrument, whether
primarily or secondarily. Thus, it has been held that in lending
his name to the accommodated party, the accommodation
party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the
accommodation party in this case, as petitioner suggests, the
inevitable question is whether or not it may be held liable on
the accommodation instrument, that is, the check issued in
favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law
which holds an accommodation party liable on the instrument
to a holder for value, although such holder at the time of
taking the instrument knew him to be only an accommodation
party, does not include nor apply to corporations which are
accommodation parties. 7 This is because the issue or
indorsement of negotiable paper by a corporation without
consideration and for the accommodation of another is ultra
vires. 8 Hence, one who has taken the instrument with
knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an
accommodation party. If the form of the instrument, or the
nature of the transaction, is such as to charge the indorsee
with knowledge that the issue or indorsement of the
instrument by the corporation is for the accommodation of
another, he cannot recover against the corporation thereon. 9
By way of exception, an officer or agent of a corporation shall
have the power to execute or indorse a negotiable paper in
the name of the corporation for the accommodation of a third
person only if specifically authorized to do so. 10 Corollarily,
corporate officers, such as the president and vice-president,
have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual
debts or transactions arising from or in relation to matters in

which the corporation has no legitimate concern. Since such

accommodation paper cannot thus be enforced against the
corporation, especially since it is not involved in any aspect of
the corporate business or operations, the inescapable
conclusion in law and in logic is that the signatories thereof
shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the
aforesaid decisional rules. If we indulge petitioner in her
aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the
check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound
by an accommodation paper does not thereby absolve, but
should render personally liable, the signatories of said
instrument where the facts show that the accommodation
involved was for their personal account, undertaking or
purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged
with the knowledge that the cheek was issued at the instance
and for the personal account of Atty. Benares who merely
prevailed upon respondent Santos to act as co-signatory in
accordance with the arrangement of the corporation with its
depository bank. That it was a personal undertaking of said
corporate officers was apparent to petitioner by reason of her
personal involvement in the financial arrangement and the
fact that, while it was the corporation's check which was
issued to her for the amount involved, she actually had no
transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's
claims being directed personally against Atty. Oscar Z.
Benares and respondent Ricardo S. Santos, Jr., president and
vice-president, respectively, of Mover Enterprises, Inc.
2.
On her second assignment of error, petitioner argues
that the Court of Appeals erred in holding that the
consignation of the sum of P45,000.00, made by private
respondent after his tender of payment was refused by
petitioner, was proper under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship
exists between the parties, hence consignation is not proper.
Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an
accommodation party.
As previously discussed, however, respondent Santos is an
accommodation party and is, therefore, liable for the value of
the check. The fact that he was only a co-signatory does not
detract from his personal liability. A co-maker or co-drawer
under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that
matter, as a lone signatory in an accommodation instrument.
Under the doctrine in Philippine Bank of Commerce vs.
Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as
the other co-surety, assume solidary liability ex lege for the
debt involved. With the dishonor of the check, there was
created a debtor-creditor relationship, as between Atty.
Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables
respondent Santos to resort to an action of consignation
where his tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the
remedy of consignation is proper under the given
circumstances, we do not thereby rule that all the operative
facts for consignation which would produce the effect of
payment are present in this case. Those are factual issues
that are not clear in the records before us and which are for
the Regional Trial Court of Quezon City to ascertain in Civil
Case No. Q-33160, for which reason it has advisedly been
directed by respondent court to give due course to the
complaint for consignation, and which would be subject to
such issues or claims as may be raised by defendant and the
counterclaim filed therein which is hereby ordered similarly
revived.
3.
That respondent court virtually prejudged Criminal
Case No. Q-14687 of the Regional Trial Court of Quezon City
filed against private respondent for violation of Batas
Pambansa Blg. 22, by holding that no criminal liability had yet
attached to private respondent when he deposited with the
court the amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.

Indeed, respondent court went beyond the ratiocination called

for in the appeal to it in CA-G.R. CV. No. 05464. In its own
decision therein, it declared that "(t)he lone issue dwells in the
question of whether an accommodation party can validly
consign the amount of the debt due with the court after his
tender of payment was refused by the creditor." Yet, from the
commercial and civil law aspects determinative of said issue,
it digressed into the merits of the aforesaid Criminal Case No.
Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of
knowledge of such insufficiency of funds or credit. Thus, the
making, drawing and issuance of a check, payment of which is
refused by the drawee because of insufficient funds in or
credit with such bank is prima facie evidence of knowledge of
insufficiency of funds or credit, when the check is presented
within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22
provides that the element of knowledge of insufficiency of
funds or credit is not present and, therefore, the crime does
not exist, when the drawer pays the holder the amount due or
makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice
that such check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that the
plaintiff-appellant acted within Ms legal rights when he
consigned the amount of P45,000.00 on August 14, 1981,
between August 7, 1981, the date when plaintiff-appellant
receive (sic) the notice of non-payment, and August 14, 1981,
the date when the debt due was deposited with the Clerk of
Court (a Saturday and a Sunday which are not banking days)
intervened. The fifth banking day fell on August 14, 1981.
Hence, no criminal liability has yet attached to plaintiffappellant when he deposited the amount of P45,000.00 with
the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the
intrusion into the merits of the criminal case pending in
another court are improper do not have to be belabored. In
the latter case, the criminal trial court has to grapple with
such factual issues as, for instance, whether or not the period
of five banking days had expired, in the process determining
whether notice of dishonor should be reckoned from any prior
notice if any has been given or from receipt by private
respondents of the subpoena therein with supporting
affidavits, if any, or from the first day of actual preliminary
investigation; and whether there was a justification for not
making the requisite arrangements for payment in full of such
check by the drawee bank within the said period. These are
matters alien to the present controversy on tender and
consignation of payment, where no such period and its legal
effects are involved.
These are aside from the considerations that the disputed
period involved in the criminal case is only a presumptive
rule, juris tantum at that, to determine whether or not there
was knowledge of insufficiency of funds in or credit with the
drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite
quantum of evidence in the two types of cases are not the
same.
To repeat, the foregoing matters are properly addressed to the
trial court in Criminal Case No. Q-14867, the resolution of
which should not be interfered with by respondent Court of
Appeals at the present posture of said case, much less
preempted by the inappropriate and unnecessary holdings in
the aforequoted portion of the decision of said respondent
court. Consequently, we modify the decision of respondent
court in CA-G.R. CV No. 05464 by setting aside and declaring
without force and effect its pronouncements and findings
insofar as the merits of Criminal Case No. Q-14867 and the
liability of the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the
judgment of respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 11897

September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendantsappellants.
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized
under the laws of the Philippine Islands, and in 1913 and
1914, the time of the occurrences which gave rise to this
lawsuit, was engaged in the business of maintaining and
conducting a theatre in the city of Manila for the exhibition of
cinematographic films. Under the articles of incorporation the
company is authorized to manufacture, buy, or otherwise
obtain all accessories necessary for conducting such a
business. The plaintiff J. F. Ramirez was, at the same time, a
resident of the city of Paris, France, and was engaged in the
business of marketing films for a manufacturer or
manufacturers, there engaged in the production or
distribution of cinematographic material. In this enterprise the
plaintiff was represented in the city of Manila by his son, Jose
Ramirez.
In the month of July, 1913, certain of the directors of the
Orientalist Company, in Manila, became apprised of the fact
that the plaintiff in Paris had control of the agencies for two
different marks of films, namely, the "Eclair Films" and the
"Milano Films;" and negotiations were begun with said officials
of the Orientalist Company by Jose Ramirez, as agent of the
plaintiff, for the purpose of placing the exclusive agency of
these films in the hands of the Orientalist Company. The
defendant Ramon J. Fernandez, one of the directors of the
Orientalist Company and also its treasure, was chiefly active
in this matter, being moved by the suggestions and
representations of Vicente Ocampo, manage of the Oriental
Theater, to the effect that the securing of the said films was
necessary to the success of the corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as
representative of his father, placed in the hands of Ramon J.
Fernandez an offer, dated July 4, 1913, stating detail the
terms upon which the plaintiff would undertake to supply from
Paris the aforesaid films. This officer was declared to be good
until the end of July; and as only about for the Orientalist
Company to act on the matter speedily, if it desired to take
advantage of said offer. Accordingly, Ramon J. Fernandez, on
July 30, had an informal conference with all the members of
the company's board of directors except one, and with
approval of those with whom he had communicated,
addressed a letter to Jose Ramirez, in Manila, accepting the
offer contained in the memorandum of July 4th for the
exclusive agency of the Eclair films. A few days later, on
August 5, he addressed another letter couched in the same
terms, likewise accepting the office of the exclusive agency
for the Milano Films.
The memorandum offer contained a statement of the price at
which the films would be sold, the quantity which the
representative of each was required to take and information
concerning the manner and intervals of time for the
respective shipments. The expenses of packing,
transportation and other incidentals were to be at the cost of
the purchaser. There was added a clause in which J. F. Ramirez
described his function in such transactions as that of a
commission agent and stated that he would see to the prompt
shipment of the films, would pay the manufacturer, and take
care that the films were insured his commission for such
services being fixed at 5 per cent.
What we consider to be the most portion of the two letters of
acceptance written by R. J. Fernandez to Jose Ramirez is in the
following terms:
We willingly accepted the officer under the terms
communicated by your father in his letter dated at Paris on
July 4th of the present year.
These communications were signed in the following form, in
which it will be noted the separate signature of R. J.
Fernandez, as an individual, is placed somewhat below and to

the left of the signature of the Orientalist Company as singed

by R. J. Fernandez, in the capacity of treasurer:
THE ORIENTALIST COMPANY,
By R. J. FERNANDEZ,
Treasurer,
R. J. FERNANDEZ.
Both of these letters also contained a request that Jose
Ramirez should at once telegraph to his father in Paris that his
offer had been accepted by the Orientalist Company and
instruct him to make a contract with the film companies,
according to the tenor of the offer, and in the capacity of
attorney-in-fact for the Orientalist Company. The idea behind
the latter suggestion apparently was that the contract for the
films would have to be made directly between the filmproducing companies and the Orientalist Company; and it
seemed convenient, in order to save time, that the Orientalist
Company should clothed J. F. Ramirez with full authority as its
attorney-in-fact. This idea was never given effect; and so far
as the record shows, J. F. Ramirez himself procured the films
upon his own responsibility, as he indicated in the officer of
July 4 that he would do, with the result that the only
contracting parties in this case are J. F. Ramirez of the one
part, and the Orientalist Company, with Ramon J. Fernandez of
the other.
In due time the films began to arrive in Manila, a draft for the
cost and expenses incident to each shipment being attached
to the proper bill of lading. It appears that the Orientalist
Company was without funds to meet these obligations and the
first few drafts were dealt with in the following manner: The
drafts, upon presented through the bank, were accepted in
the name of the Orientalist Company by its president B.
Hernandez, and were taken up by the latter with his own
funds. As the drafts had thus been paid by B. Hernandez, the
films which had been procured by he payment of said drafts
were treated by him as his own property; and they in fact
never came into the actual possession of the Orientalist
Company as owner at all, though it is true Hernandez rented
the films to the Orientalist Company and they were exhibited
by it in the Oriental Theater under an arrangement which was
made between him and the theater's manager.
During the period between February 27, 1914, and April 30,
1914, there arrived in the city of Manila several remittances of
films from Paris, and it is these shipments which have given
occasion for the present action. All of the drafts
accompanying these films were drawn, as on former
occasions, upon the Orientalist Company; and all were
accepted in the name of B. Hernandez, except the last, which
was accepted by B. Hernandez individually. None of the drafts
thus accepted were taken up by the drawee or by B.
Hernandez when they fell due; and it was finally necessary for
the plaintiff himself to take them up as dishonored by nonpayment.
Thereupon this action was instituted by the plaintiff on May
19, 1914, against the Orientalist Company, and Ramon J.
Fernandez. As the films which accompanied the dishonored
were liable to deteriorate, the court, upon application of the
plaintiff, and apparently without opposition on the part of the
defendants, appointed a receiver who took charge of the films
and sold them. The amount realized from this sale was
applied to the satisfaction of the plaintiff's claim and was
accordingly delivered to him in part payment thereof. At trial
judgment was given for the balance due to the plaintiff,
namely P6,018.93, with interest from May 19, 1914, the date
of the institution of the action. In the judgment of the trial
court the Orientalist Company was declared to be a principal
debtor and Ramon J. Fernandez was declared to be liable
subsidiarily as guarantor. From this judgment both of the
parties defendant appealed.
In this Court neither of the parties appellant make any
question with respect to the right of the plaintiff to recover
from somebody the amount awarded by the lower court; but
each of the defendants insists the other is liable for the whole.
It results that the real contention upon this appeal is between
the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez
and the statement is not challenged by the Orientalist
Company that the judgment has already been executed as
against the company is exclusively and primarily liable the
entire indebtedness, the question as to the liability of Ramon
J. Fernandez would be academic. But if the latter is liable as
principal obligor for the whole or any part of the debt, it will
be necessary to modify the judgment in order to adjust the
rights of the defendants in accordance with such finding.

It will be noted that the action is primarily founded upon the

liability created by the letters dated July 30th and August 5,
1913, in connection with the plaintiff's offer of July 4, 1913;
and both of the letters mentioned are copied into the
complaint as the foundation of the action. The action is not
based upon the dishonored drafts which were accepted by B.
Hernandez in the name of the Orientalist Company; and
although these drafts, as well as the last draft, which was
accepted by B. Hernandez individually, have been introduced
in evidence, this was evidently done for the purpose of
proving the amount of damages which the plaintiff was
entitled to recover.
In the discussion which is to follow we shall consider, first, the
question of the liability of the corporation upon the contracts
contained in the letters of July 30 and August 5, 1913, and,
secondly the question of the liability of Ramon J. Fernandez,
based upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of
importance arises upon the pleadings. The action, as already
stated, is based upon documents purporting to be signed by
the Orientalist Company, and copies of the documents are set
out in the complaint. It was therefore incumbent upon the
corporation, if it desired to question the authority of
Fernandez to bind it, to deny the due execution of said
contracts under oath, as prescribed in section 103 of the Code
of Civil procedure. Said section, in the part pertinent to the
situation now under consideration, reads as follows:
When an action is brought upon a written instrument and the
complaint contains or has annexed or has annexed a copy of
such instrument, the genuineness and due execution of the
instrument shall be deemed admitted, unless specifically
denied under oath in the answer.
No sworn answer denying the genuineness and due execution
of the contracts in question or questioning the authority of
Ramon J. Fernandez to bind the Orientalist Company was filed
in this case; but evidence was admitted without objection
from the plaintiff, tending to show that Ramon J. Fernandez
had no such authority. This evidence consisted of extracts
from the minutes of the proceedings of the company's board
of directors and also of extracts from the minutes of the
proceedings of the company's stockholders, showing that the
making of this contract had been under consideration in both
bodies and that the authority to make the same had been
withheld by the stockholders. It therefore becomes necessary
for us to consider whether the administration resulting from
the failure of the defendant company to deny the execution of
the contracts under oath is binding upon it for all purposes of
this lawsuit, or whether such failure should be considered a
mere irregularity of procedure which was waived when the
evidence referred to was admitted without objection from the
plaintiff. The proper solution of this problem makes it
necessary to consider carefully the principle underlying the
provision above quoted.
That the situation was one in which an answer under oath
denying the authority of the agent should have been
interposed, supposing that the company desired to contest
this point, is not open to question. In the case of Merchant vs.
International Banking Corporation, (6 Phil. Rep., 314), it
appeared that one Brown has signed the name of the
defendant bank as guarantor of a promissory note. The bank
was sued upon this guaranty and at the hearing attempted to
prove that Brown had no authority to bind the bank by such
contract. It was held that buy failing to deny the contract
under oath, the bank had admitted the genuineness and due
execution thereof, and that this admission extended not only
to the authenticity of the signature of Brown but also to his
authority. Said Justice Willard: "The failure of the defendant to
deny the genuineness and due execution of this guaranty
under oath was an admission not only of the signature of
Brown, but also his authority to make the contract in behalf of
the defendant and of the power the contract in behalf of the
defendant and of the power of the defendant to enter into
such a contract.
The rule thus stated is in entire accord with the doctrine
prevailing in the United States, as will be seen by reference to
the following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was
an action against a mining corporation upon an appeal bond.
The name of the company had been affixed to the obligation
by an agent, and no sufficient affidavit was filed by the
corporation questioning its signature or the authority of the
agent to bind the company. It was held that the plaintiff did
not have to prove the due execution of the bond and that the
corporation as to be taken as admitting the authority of the
agent to make the signature. Among other things the court

said: "But it is said that the authority of Barrett to execute the

bond is distinguishable from the signing and, although the
signature must be denied under oath, the authority of the
agent need not be. Upon this we observe that the statute
manifestly refers to the legal effect of the signature, rather
than the manual act of singing. If the name of the obligor, in a
bond, is subscribed by one in his presence, and by his
direction, the effect is the same as if his name should be
signed with his own hand, and under such circumstances we
do not doubt that the obligor must deny his signature under
oath, in order to put the obligee to proof of the fact. Quit facit
per aliam facit per se, and when the name is signed by one
thereunto authorized, it is as much as the signature of the
principal as if written with his own hand. Therefore, if the
principal would deny the authority of the agent, as the validity
of the signature is thereby directly attacked, the denial must
be under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was
brought upon a promissory note purporting to have been
given by on A. B., as the treasurer of the defendant company.
Said the court: "Under the Judiciary Act of 1799, requiring the
defendant to deny on oath an instrument of writing, upon
which he is sued, the plea in this case should have been
verified.
If the person who signed this note for the company, and upon
which they are sued, was not authorized to make it, let them
say so upon oath, and the onus is then on the plaintiff to
overcome the plea."
It should be noted that the provision contained in section 103
of our Code of Civil Procedure is embodied in some form or
other in the statutes of probably all of the American States,
and it is not by any means peculiar to the laws of California,
though it appears to have been taken immediately from the
statutes of that State. (Secs. 447, 448, California Code of Civil
Procedure.)
There is really a broader question here involved than that
which relates merely to the formality of verifying the answer
with an affidavit. This question arises from the circumstance
that the answer of the corporation does not in any was
challenge the authority of Ramon J. Fernandez to bind it by
the contracts in question and does not set forth, as a special
defense, any such lack of authority in him. Upon wellestablished principles of pleading lack of authority in an
officer of a corporation to bind it by a contract executed by
him in its name is a defense which should be specially
pleaded and this quite apart from the requirement,
contained in section 103, that the answer setting up such
defense should be verified by oath. But is should not here
escape observation that section 103 also requires in denial
contemplated in that section shall be specific. An attack on
the instrument in general terms is insufficient, even though
the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep.,
254.)
In the first edition of a well-known treatise on the laws of
corporations we find the following proposition:
If an action is brought against a corporation upon a contract
alleged to be its contract, if it desires to set up the defense
that the contract was executed by one not authorized as its
agent, it must plead non est factum. (Thompson on
Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
A corporation can not avail itself of the defense that it had no
power to enter into the obligation to enforce which the suit is
brought, unless it pleads that defense. This principle applies
equally where the defendant intends to challenge the power
of its officer or agent to execute in its behalf the contract
upon which the action brought and where it intends to defend
on the ground of total want of power in the corporation to
make such a contract. (Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to
issue negotiable paper in its name is not presumed, such
corporation can not avail itself of a want of power in its
officers to bind it unless the defense was made on such
ground.
The rule has been applied where the question was whether
corporate officer, having admitted power to make a contract,
had in the particular instance exceeded that authority, (Merill
vs. Consumers' Coal Co., 114 N.Y., 216); and it has been held
that where the answer in a suit against a corporation on its
note relies simply on the want of power of the corporation to

issue notes, the defendant can not afterwards object that the
plaintiff has not shown that the officer executing the note
were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6
Cal., 1.)
The reason for the rule enunciated in the foregoing authorities
will, we think, be readily appreciated. In dealing with
corporations the public at large is bound to rely to a large
extent upon outward appearances. If a man is found acting for
a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually
rely upon those appearances; and if it be found that the
directors had permitted the agent to exercise that authority
and thereby held him out as a person competent to bind the
corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual
authority may never have been granted. The public is not
supposed nor required to know the transactions which happen
around the table where the corporate board of directors or the
stockholders are from time to time convoked. Whether a
particular officer actually possesses the authority which he
assumes to exercise is frequently known to very few, and the
proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers. It is
therefore reasonable, in a case where an officer of a
corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is
apprised of the fact that the agent's authority is contested;
and he is given an opportunity to adduce evidence showing
either that the authority existed or that the contract was
ratified and approved.
We are of the opinion that the failure of the defendant
corporation to make any issue in its answer with regard to the
authority of Ramon J. Fernandez to bind it, and particularly its
failure to deny specifically under oath the genuineness and
due execution of the contracts sued upon, have the effect of
elimination the question of his authority from the case,
considered as a matter of mere pleading. The statute (sec.
103) plainly says that if a written instrument, the foundation
of the suit, is not denied upon oath, it shall be deemed to be
admitted. It is familiar doctrine that an admission made in a
pleading can not be controverted by the party making such
admission; and all proof submitted by him contrary thereto or
inconsistent therewith should simply be ignored by the court,
whether objection is interposed by the opposite party or not.
We can see no reason why a constructive admission, created
by the express words of the statute, should be considered to
have less effect than any other admission.
The parties to an action are required to submit their
respective contentions to the court in their complaint and
answer. These documents supply the materials which the
court must use in order to discover the points of contention
between the parties; and where the statute says that the due
execution of a document which supplies the foundation of an
action is to be taken as admitted unless denied under oath,
the failure of the defendant to make such denial must be
taken to operate as a conclusive admission, so long as the
pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil
Procedure that immaterial variances between the allegations
of a pleading and the proof shall be disregarded and the facts
shall be found according to the evidence. The same section,
however, recognizes the necessity for an amendment of the
pleadings. And judgment must be in conformity with the case
made in conformity with the case made in the pleadings and
established by the proof, and relief can not be granted that is
substantially inconsistent with either. A party can no more
succeed upon a case proved but not alleged than upon a case
alleged but nor proved. This rule of course operates with like
effect upon both parties, and applies equality to the
defendants special defense as to the plaintiffs cause of action.
Of course this Court, under section 109 of the Code of Civil
Procedure, has authority even now to permit the answer of
the defendant to be amended; and if we believed that the
interests of justice so required, we would either exercise that
authority or remand the cause for a new trial in court below.
As will appear further on in this opinion, however, we think
that the interests of justice will best be promoted by deciding
the case, without more ado, upon the issues presented in the
record as it now stands.
That we may not appear to have overlooked the matter, we
will observe that two cases are cited from California in which
the Supreme Court of the State has held that where a release
is pleaded by way of defense and evidence tending to destroy

its effect is introduced without objection, the circumstance

that it was not denied under oath is immaterial. In the earlier
of these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an
action was brought against a railroad company to recover
damages for the death of the plaintiff's minor son, alleged to
have been killed by the negligence of the defendant. The
defendant company pleaded by way of defense a release
purporting to be signed by the plaintiff, and in its answer
inserted a copy of the release. The execution of the release
was not denied under oath; but at the trial evidence was
submitted on behalf of the plaintiff tending to show that at the
time he signed the release, he was incompetent by reason of
drunkenness to bind himself thereby. It was held that
inasmuch as this evidence had been submitted by the plaintiff
without objection, it was proper for the court to consider it. We
do not question the propriety of that decision, especially as
the issue had been passed upon by a jury; but we believe that
the decision would have been more soundly planted if it had
been said that the incapacity of the plaintiff, due to his
drunken condition, was a matter which did not involve either
the genuineness or due execution of the release. Like the
defenses of fraud, coercion, imbecility, and mistake, it was a
matter which could be proved under the general issue and did
not have to be set up in a sworn reply. (Cf. Moore vs. Copp,
119 Cal., 429, 432, 433.) A somewhat similar explanation can,
we think, be given of the case of Clark vs. Child in which the
rule declared in the earlier case was followed. With respect to
both decisions which we merely observe that upon point of
procedure which they are supposed to maintain, the reasoning
of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company
on the merits just as if that liability had been properly put in
issue by a specific answer under oath denying the authority of
Fernandez go to bind it. Upon this question it must at the
outset be premised that Ramon J. Fernandez, as treasurer, had
no independent authority to bind the company by signing its
name to the letters in question. It is declared by signing its
name to the letters in question. It is declared in section 28 of
the Corporation Law that corporate power shall be exercised,
and all corporate business conducted by the board of
directors; and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring
that the power to make contracts shall be vested in the board
of directors. It is true that it is also declared in the same bylaws that the president shall have the power, and it shall be
his duty, to sign contract; but this has reference rather to the
formality of reducing to proper form the contract which are
authorized by the board and is not intended to confer an
independent power to make contract binding on the
corporation.
The fact that the power to make corporate contract is thus
vested in the board of directors does not signify that a formal
vote of the board must always be taken before contractual
liability can be fixed upon a corporation; for the board can
create liability, like an individual, by other means than by a
formal expression of its will. In this connection the case of
Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is
instructive. If there appeared that the secretary of the
defendant corporation had signed an obligation on its behalf
binding it as guarantor of the performance of an important
contract upon which the name of another corporation
appeared as principal. The defendant company set up by way
of defense that is secretary had no authority to bind it by such
an engagement. The court found that the guaranty was given
with the knowledge and consent of the president and
directors, and that this consent of the president and directors,
and that this consent was given with as much observance of
formality as was customary in the transaction of the business
of the company. It was held that, so far as the authority of the
secretary was concerned, the contract was binding. In
discussing this point, the court quoted with approval the
following language form one of its prior decisions:
The authority of the subordinate agent of a corporation often
depends upon the course of dealings which the company or
its director have sanctioned. It may be established sometimes
without reference to official record of the proceedings of the
board, by proof of the usage which the company had
permitted to grow up in business, and of the acquiescence of
the board charged with the duty of supervising and controlling
the company's business.
It appears in evidence, in the case now before us, that on July
30, the date upon which the letter accepting the offer of the
Eclair films was dispatched the board of directors of the
Orientalist Company convened in special session in the office
of Ramon J. Fernandez at the request of the latter. There were
present the four members, including the president, who had
already signified their consent to the making of the contract.
At this meeting, as appears from the minutes, Fernandez

informed the board of the offer which had been received from
the plaintiff with reference to the importation of films. The
minutes add that terms of this offer were approved; but at the
suggestion of Fernandez it was decided to call a special
meeting of the stockholders to consider the matter and
definite action was postponed.
The stockholders meeting was convoked upon September 18,
1913, upon which occasion Fernandez informed those present
of the offer in question and of the terms upon which the films
could be procured. He estimated that the company would
have to make an outlay of about P5,500 per month, if the
offer for the two films should be accepted by it.
The following extracts from the minutes of this meeting are
here pertinent:
Mr. Fernandez informed the stockholders that, in view of the
urgency of the matter and for the purpose of avoiding that
other importers should get ahead of the corporation in this
regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr.
Papa met for the purpose of considering the acceptance of the
offer together with the responsibilities attached thereto, made
to the corporation by the film manufacturers of Eclair and
Milano of Paris and Italy respectively, inasmuch as the first
shipment of films was then expected to arrive.
At the same time he informed the said stockholders that he
had already made arrangements with respect to renting said
films after they have been once exhibited in the Cine Oriental,
and that the corporation could very well meet the expenditure
involved and net a certain profit, but that, if we could enter
into a contract with about nine cinematographs, big gains
would be obtained through such a step.
The possibility that the corporation might not see fit to
authorize the contract, or might for lack of funds be unable to
make the necessary outlay, was foreseen; and in such
contingency the stockholders were informed, that the four
gentlemen above mentioned (Hernandez, Fernandez, Monroy,
and Papa) "would continue importing said films at their own
account and risk, and shall be entitled only to a compensation
of 10 per cent of their outlay in importing the films, said
payment to be made in shares of said corporation, inasmuch
as the corporation is lacking available funds for the purpose,
and also because there are 88 shares of stock remaining still
unsold."
In view of this statement, the stockholders adopted a
resolution to the effect that the agencies of the Eclair and
Milano films should be accepted, if the corporation could
obtain the money with which to meet the expenditure
involved, and to this end appointed a committee to apply to
the bank for a credit. The evidence shows that an attempt was
made, on behalf of the corporation, to obtain a credit of
P10,000 from the Bank of the Philippine Islands for the
purpose indicated, but the bank declined to grant his credit.
Thereafter another special meeting of the shareholders of the
defendant corporation was called at which the failure of their
committee to obtain a credit from the bank was made known.
A resolution was thereupon passed to the effect that the
company should pay to Hernandez, Fernandez, Monroy, and
Papa an amount equal to 10 per cent of their outlay in
importing the films, said payment to be made in shares of the
company in accordance with the suggestion made at the
previous meeting. At the time this meeting was held three
shipment of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the
minutes of the stockholders meeting of September 18, and
especially from the first paragraph above quoted, that this
body was then cognizant that the officer had already been
accepted in the name of the Orientalist Company and that the
films which were then expected to arrive were being imported
by virtue of such acceptance. Certainly four members of the
board of directors there present were aware of this fact, as the
letter accepting the offer had been sent with their knowledge
and consent. In view of this circumstance, a certain doubt
arises whether they meant to utilize the financial assistance of
the four so-called importers in order that the corporation
might bet the benefit of the contract for the films, just as it
would have utilized the credit of the bank if such credit had
been extended. If such was the intention of the stockholders
their action amounted to a virtual, though indirect, approval of
the contract. It is not however, necessary to found the
judgment on this interpretation of the stockholders
proceedings, inasmuch as we think for reasons presently to be
stated, that the corporation is bound, and we will here assume
that in the end the contract were not approved by the
stockholders.

It will be observed that Ramon J. Fernandez was the particular

officer and member of the board of directors who was most
active in the effort to secure the films for the corporation. The
negotiations were conducted by him with the knowledge and
consent of other members of the board; and the contract was
made with their prior approval. As appears from the papers in
this record, Fernandez was the person to who keeping was
confided the printed stationery bearing the official style of the
corporation, as well as rubber stencil with which the name of
the corporation could be signed to documents bearing its
name.
Ignoring now, for a moment, the transactions of the
stockholders, and reverting to the proceedings of the board of
directors of the Orientalist Company, we find that upon
October 27, 1913, after Fernandez had departed from the
Philippine Islands, to be absent for many months, said board
adopted a resolution conferring the following among other
powers on Vicente Ocampo, the manager of the Oriental
theater, namely:
(1)

To rent a box for the films in the "Kneeler Building."

(4)
same.

To be in charge of the films and of the renting of the

(5)
To advertise in the different newspapers that we are
importing films to be exhibited in the Cine Oriental.
(6)
Not to deliver any film for rent without first receiving
the rental therefor or the guaranty for the payment thereof.
(7)
To buy a book and cards for indexing the names of
the films.
(10)
Upon the motion of Mr. Ocampo, it was decided to
give ample powers to the Hon. R. Acua to enter into
agreements with cinematograph proprietors in the provinces
for the purpose of renting films from us.
It thus appears that the board of directors, before the financial
inability of the corporation to proceed with the project was
revealed, had already recognized the contract as being in
existence and had proceeded to take the steps necessary to
utilize the films. Particularly suggestive is the direction given
at this meeting for the publication of announcements in the
newspapers to the effect that the company was engaged in
importing films. In the light of all the circumstances of the
case, we are of the opinion that the contracts in question were
thus inferentially approved by the company's board of
directors and that the company is bound unless the
subsequent failure of the stockholders to approve said
contracts had the effect of abrogating the liability thus
created.
Both upon principle and authority it is clear that the action of
the stockholders, whatever its character, must be ignored.
The functions of the stockholders of a corporation are, it must
be remembered, of a limited nature. The theory of a
corporation is that the stockholders may have all the profits
but shall turn over the complete management of the
enterprise to their representatives and agents, called
directors. Accordingly, there is little for the stockholders to do
beyond electing directors, making by-laws, and exercising
certain other special powers defined by-law. In conformity
with this idea it is settled that contract between a corporation
and third person must be made by the director and not by the
stockholders. The corporation, in such matters, is represented
by the former and not by the latter. (Cook on Corporations,
sixth ed., secs. 708, 709.) This conclusion is entirely accordant
with the provisions of section 28 of our Corporation Law
already referred to. It results that where a meeting of the
stockholders is called for the purpose of passing on the
propriety of making a corporate contract, its resolutions are at
most advisory and not in any wise binding on the board.
In passing upon the liability of a corporation in cases of this
kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily
rely upon the external manifestations of corporate consent.
The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law, and we
would be sorry to announce a doctrine which would permit the
property of a man in the city of Paris to be whisked out of his
hands and carried into a remote quarter of the earth without
recourse against the corporations whose name and authority
had been used in the manner disclosed in this case. As
already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officer, or any other agent, to do

acts within the scope of an apparent authority, and thus hold

him out to the public as possessing power to do those acts,
the corporation will as against any one who has in good faith
dealt with the corporation through such agent, be estopped
from denying his authority; and where it is said "if the
corporation permits" this means the same as "if the thing is
permitted by the directing power of the corporation."
It being determined that the corporation is bound by the
contract in question, it remains to consider the character of
the liability assumed by R. J. Fernandez, in affixing his
personal signature to said contract. The question here is
whether Fernandez is liable jointly with the Orientalists
Company as a principal obligor, or whether his liability is that
of a guarantor merely.
As appears upon the face of the contracts, the signature of
Fernandez, in his individual capacity, is not in line with the
signature of the Orientalist Company, but is set off to the left
of the company's signature and somewhat who sign contracts
in some capacity other than that of principal obligor to place
their signature alone would justify a court in holding that
Fernandez here took upon himself the responsibility of a
guarantor rather than that of a principal obligor. We do,
however, think, that the form in which the contract is signed
raises a doubt as to what the real intention was; and we feel
justified, in looking to the evidence to discover that intention.
In this connection it is entirely clear, from the testimony of
both Ramirez and Ramon J. Fernandez, that the responsibility
of the latter was intended to be that of guarantor. There is, to
be sure, a certain difference between these witnesses as to
the nature of this guaranty, inasmuch as Fernandez would
have us believe that his name was signed as a guaranty that
the contract would be approved by the corporation, while
Ramirez says that the name was put on the contract for the
purpose of guaranteeing, not the approval of the contract, but
its performance. We are convinced that the latter was the real
intention of the contracting parties.
We are not unmindful of the force of that rule of law which
declares that oral evidence is admissible to show the
character in which the signature was affixed. This conclusion
is perhaps supported by the language of the second
paragraph of article 1281 of the Civil Code, which declares
that if the words of a contract should appear contrary to the
evident intention of the parties, the intention shall prevail. But
the conclusion reached is, we think, deducible from the
general principle that in case of ambiguity parol evidence is
admissible to show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case
have been framed, the only question presented to this court
is: To what extent are the signatory parties to the contract
liable to the plaintiff J. F. Ramirez? No contentious issue is
raised directly between the defendants, the Orientalist
Company and Ramon H. Fernandez; nor does the present the
present action involve any question as to the undertaking of
Fernandez and his three associates to effect the importation
of the films upon their own account and risk. Whether they
may be bound to hold the company harmless is a matter upon
which we express no opinion.
The judgment appealed from is affirmed, with costs equally
against the two appellant. So ordered.
Torres, Johnson, Malcolm, Avancea and Fisher, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

President & Chairman

THIRD DIVISION

YAO KA SIN TRADING

BY: (SGD) HENRY YAO

G.R. No. L-53820 June 15, 1992

YAO KA SIN TRADING, owned and operated by YAO KA SIN,
petitioner,
vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT
CORPORATION, represented by its President-Chairman,
CONSTANCIO B. MALAGNA, respondents.

DAVIDE, JR., J.:

Assailed in this petition for review is the decision of the
respondent Court of Appeals in C.A.-G.R. No. 61072-R, 1
promulgated on 21 December 1979, reversing the decision 2
of the then Court of First Instance (now Regional Trial Court) of
Leyte dated 20 November 1975 in Civil Case No. 5064 entitled
"Yao Ka Sin Trading versus Prime White Cement Corporation."
The root of this controversy is the undated letter-offer of
Constancio B. Maglana, President and Chairman of the Board
of private respondent Prime White Cement Corporation,
hereinafter referred to as PWCC, to Yao Ka Sin Trading,
hereinafter referred to as YKS, which describes itself as "a
business concern of single proprietorship," 3 and is
represented by its manager, Mr. Henry Yao; the letter reads as
follows:
PRIME WHITE CEMENT CORPORATION
602 Cardinal Life Building
Herran Street, Manila
Yao Ka Sin
Tacloban City
Gentlemen:
We have the pleasure to submit hereby our firm offer to you
under the following quotations, terms, and conditions, to wit:
1).

Commodity Prime White Cement

2).
Price At your option: a) P24.30 per 94 lbs. bag net,
FOB Cebu City; and b) P23.30 per 94 lbs. bag net, FOB
Asturias Cebu.
3).
Quality As fully specified in certificate No. 224-73
by Bureau of Public Works, Republic of the Philippines.
4).
Quantity Forty-five Thousand (45,000) bags at 94
lbs. net per bag withdrawable in guaranteed monthly quantity
of Fifteen Thousand (15,000) bags minimum effective from
June, 1973 to August 1973.
5).
Delivery Schedule Shipment be made within four
(4) days upon receipt of your shipping instruction.
6).
Bag/Container a) All be made of Standard Kraft
(water resistant paper, 4 ply, with bursting strength of 220
pounds, and b) Breakage allowance additional four percent
(4%) over the quantity of each shipment.
7).
Terms of Payment Down payment of PESOS: TWO
HUNDRED FORTY THREE THOUSAND (P243,000.00) payable
on the signing of this contract and the balance to be paid
upon presentation of corresponding shipping documents.
It is understood that in the event of a delay in our shipment,
you hold the option to discount any price differential resulting
from a lower market price vis-a-vis the contract price. In
addition, grant (sic) you the option to extend this contract
until the complete delivery of Forty Five Thousand (45,000)
bags of 94 lbs. each is made by us. You are also hereby
granted the option to renew this contract under the same
price, terms and conditions.
Please countersign on the space provided for below as your
acknowledgement and confirmation of the above transaction.
Thank You.
Very truly yours,
PRIME WHITE CEMENT CORPORATION
BY: (SGD) CONSTANCIO B. MAGLANA

CONFORME:

WITNESSES:
(SGD) T. CATINDIG

(SGD) ERNESTO LIM

RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in

pursuance of the above offer, the sum of Pesos: TWO
HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in
the form of Producers' Bank of the Philippines Check No. C153576 dated June 7, 1973.
PRIME WHITE CEMENT CORPORATION
BY:
(SGD) CONSTANCIO B. MAGLANA
President & Chairman 4
This letter-offer, hereinafter referred to as Exhibit "A", was
prepared, typed and signed on 7 June 1973 in the office of Mr.
Teodoro Catindig, Senior Vice-President of the Consolidated
Bank and Trust Corporation (Solid Bank). 5
The principal issue raised in this case is whether or not the
aforesaid letter-offer, as accepted by YKS, is a contract that
binds the PWCC. The trial court rule in favor of the petitioner,
but the respondent Court held otherwise.
The records disclose the following material operative facts:
In its meeting in Cebu City on 30 June 1973, or twenty-three
(23) days after the signing of Exhibit "A", the Board of
Directors of PWCC disapproved the same; the rejection is
evidenced by the following Minutes (Exhibit "10"):
the 10,000 bags of white cement sold to Yao Ka Sin Trading is
sold not because of the alledged letter-contract adhered to by
them, but must be understood as a new and separate
contract, and has in no way to do with the letter-offer which
they (sic) as consummated is by this resolution totally
disapproved and is unacceptable to the corporation.
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS
informing it of the disapproval of Exhibit "A". Pursuant,
however, to its decision with respect to the 10,000 bags of
cement, it is issued the corresponding Delivery Order (Exhibit
"4") and Official Receipt No. 0394 (Exhibit "5") for the
payment of the same in the amount of P243,000.00 This is the
same amount received and acknowledged by Maglana in
Exhibit "A".
YKS accepted without protest both the Delivery and Official
Receipts.
While YKS denied having received a copy of Exhibit "1", it was
established that the original thereof was shown to Mr. Henry
Yao; since no one would sign a receipt for it, the original was
left at the latter's office and this fact was duly noted in Exhibit
"1" (Exhibit "l-A").
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in
answer to the latter's 4 August 1973 letter stating that it is
"withdrawing or taking delivery of not less than 10,000 bags
of white cement on August 6-7, 1973 at Asturias, Cebu, thru
M/V Taurus." In said reply, PWCC reminded YKS of its (PWCC's)
5 July 1973 letter (Exhibit "1") and told the latter that PWCC
"only committed to you and which you correspondingly paid
10,000 bags of white cement of which 4,150 bags were
already delivered to you as of August 11, 1973. 6
Unfortunately, no copy of the said 4 August 1973 letter of YKS
was presented in evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7
to YKS in reply to the latter's letter of 15 August 1973.
Enclosed in the reply was a copy of Exhibit "2". While the
records reveal that YKS received this reply also on 21 August
1973 (Exhibit "3" "A"), 8 it still denied having received it.
Likewise, no copy of the so-called 15 August 1973 letter was
presented in evidence.
On 10 September 1973, YKS, through Henry Yao, wrote a
letter 9 to PWCC as a follow-up to the letter of 15 August
1973; YKS insisted on the delivery of 45,030 bags of white
cement. 10
On 12 September 1973, Henry Yao sent a letter (Exhibit "G")
to PWCC calling the latter's attention to the statement of

delivery dated 24 August 1973, particularly the price change

from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu.
11
On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to
PWCC insisting on the full compliance with the terms of
Exhibit "A" and informing the latter that it is exercising the
option therein stipulated.

Because of its interest in the PWCC, the NIDC, through its

comptroller, goes over contracts involving funds of and white
cement produced by the PWCC. Finally, among the duties of
its legal counsel is to review proposed contracts before they
are submitted to the Board. While the president. may be
tasked with the preparation of a contract, it must first pass
through the legal counsel and the comptroller of the
corporation. 26

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D")

as a follow-up to the 2 November 1973 telegram, but this was
returned to sender as unclaimed. 13

On 20 November 1975, after trial on the merits, the court

handed down its decision in favor of herein petitioner, the
dispositive portion of which reads:

As of 7 December 1973, PWCC had delivered only 9,775 bags

of white cement.

WHEREFORE, in view of the foregoing, judgment is hereby

rendered:

On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H")

requesting, for the last time, compliance by the latter with its
obligation under
Exhibit "A". 14

(1)
Ordering defendant: to complete the delivery of
45,000 bags of prime white cement at 94 lbs. net per bag at
the price agreed, with a breakage allowance of empty bags at
4% over the quantity agreed;

On 27 February 1974, PWCC sent an answer (Exhibit "7") to

the aforementioned letter of 9 February 1974; PWCC
reiterated the unenforceability of Exhibit "A". 15

(2)
Ordering defendant to pay P50,000.00, as moral
damages; P5,000.00 as exemplary damages; P3,000.00 as
attorney's fees; and the costs of these proceedings.

On 4 March 1974, YKS filed with the then Court of First

Instance of Leyte a complaint for Specific Performance with
Damages against PWCC. The complaint 16 was based on
Exhibit "A" and was docketed as Civil Case No. 5064.

SO ORDERED. 27

In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC

denied under oath the material averments in the complaint
and alleged that: (a) YKS "has no legal personality to sue
having no legal personality even by fiction to represent itself;"
(b) Mr. Maglana, its President and Chairman, was lured into
signing Exhibit "A"; (c) such signing was subject to the
condition that Exhibit "A" be approved by the Board of
Directors of PWCC, as corporate commitments are made
through it; (d) the latter disapproved it, hence Exhibit "A" was
never consummated and is not enforceable against PWCC; (e)
it agreed to sell 10,000 bags of white cement, not under
Exhibit "A", but under a separate contract prepared by the
Board; (f) the rejection by the Board of Exhibit "A" was made
known to YKS through various letters sent to it, copies of
which were attached to the Answer as Annexes 1, 2 and 3; 18
(g) YKS knew, per Delivery Order 19 and Official Receipt 20
issued by PWCC, that only 10;000 bags were sold to it without
any terms or conditions, at P24.30 per bag FOB Asturias,
Cebu; (h) YKS is solely to blame for the failure to take
complete delivery of 10,000 bags for it did not send its boat or
truck to PWCC's plant; and (i) YKS has, therefore, no cause of
action.
In its Counterclaim, PWCC asks for moral damages in the
amount of not less than P10,000.00, exemplary damages in
the sum of P500,000.00 and attorney's fees in the sum of
P10,000.00.
On 24 July 1974, YKS filed its Answer to the Counterclaim. 21
Issues having been joined, the trial court conducted a pretrial. 22 On that occasion, the parties admitted that according
to the By-Laws of PWCC, the Chairman of the Board, who is
also the President of the corporation, "has the power to
execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation enters into,"
subject to the qualification that "all the president's actuations,
prior to and after he had signed and executed said contracts,
shall be given to the board of directors of defendant
Corporation." Furthermore, it was likewise stated for the
record "that the corporation is a semi-subsidiary of the
government because of the NIDC participation in the same,
and that all contracts of the corporation should meet the
approval of the NIDC and/or the PNB Board because of an
exposure and financial involvement of around P10 million
therein. 23
During the trial, PWCC presented evidence to prove that
Exhibit "A" is not binding upon it because Mr. Maglana was not
authorized to make the offer and sign the contract in behalf of
the corporation. Per its By-Laws (Exhibit "8"), only the Board
of Directors has the power . . . (7) To enter into (sic)
agreement or contract of any kind with any person in the
name and for and in behalf of the corporation through its
President, subject only to the declared objects and purpose of
the corporation and the existing provisions of law. 24 Among
the powers of the President is "to operate and conduct the
business of the corporation according to his own judgment
and discretion, whenever the same is not expressly limited by
such orders, directives or resolutions." 25 Per standard
practice of the corporation, contracts should first pass through
the marketing and intelligence unit before they are finalized.

In disregarding PWCC's theory, the trial court interpreted the

provision of the By-Laws granting its Board of Directors the
power to enter into an agreement or contract of any kind with
any person through the President, to mean that the latter
may enter into such contract or agreement at any time and
that the same is not subject to the ratification of the board of
directors but "subject only to the declared objects and
purpose of the corporation and existing laws." It then
concluded:
It is obvious therefore, that it is not the whole membership of
the board of directors who actually enters into any contract
with any person in the name and for and in behalf of the
corporation, but only its president. It is likewise crystal clear
that this automatic representation of the board by the
president is limited only by the "declared objects and purpose
of the corporation and existing provisions of law." 28
It likewise interpreted the provision on the power of the
president to "operate and conduct the business of the
corporation according to the orders, directives or resolutions
of the board of directors and according to his own judgment
and discretion whenever the same is not expressly limited by
such orders, directives and resolutions," to mean that the
president can operate and conduct the business of the
corporation according to his own judgment and discretion as
long as it is not expressly limited by the orders, directives or
resolutions of the board of directors. 29 The trial court found
no evidence that the board had set a prior limitation upon the
exercise of such judgment and discretion; it further ruled that
the By-Laws, does not require that Exhibit "A" be approved by
the Board of Directors. Finally, in the light of the Chairman's
power to "execute and sign for and in behalf of the
corporation all contracts or agreements which the corporation
may enter into" (Exhibit "I-1"), it concluded that Mr. Maglana
merely followed the By-Laws "presumably both as president
and chairman of the board thereof." 30 Hence, Exhibit "A" was
validly entered into by Maglana and thus binds the
corporation.
The trial court, however, ruled that the option to sell is not
valid because it is not supported by any consideration distinct
from the price; it was exercised before compliance with the
original contract by PWCC; and the repudiation of the original
contract by PWCC was deemed a withdrawal of the option
before acceptance by the petitioner.
Both parties appealed from the said decision to the
respondent Court of Appeals before which petitioner
presented the following Assignment of Errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO
RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE
BECAUSE THE OPTION WAS MADE EVEN BEFORE THE
COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY
DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS
NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM THE
PRICE.
II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE
PLAINTIFF ACTUAL DAMAGES, SUFFICIENT EXEMPLARY

DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE

COMPLAINT AND PROVEN DURING THE TRIAL." 31
while the private respondent cited the following errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A
VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE
PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY
ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED
PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO
BE ENTERED INTO OR LATER ON RATIFIED BY THE
DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A"
WAS TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE
DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN
LANGUAGE AND DULY INFORMED AND TRANSMITTED TO
PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN
LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE
AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NONEXISTING CONTRACT.
III
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO
IMPUGN AND CONTRADICT HIS VERY OWN ACTUATIONS AND
REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS
FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS
OF CEMENT ONLY, UNDER THE PRICE, TERMS AND
CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT
FROM THOSE WHICH APPEAR IN EXHIBIT "A".
IV
THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S
COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY
CLEAR AND INDUBITABLE EVIDENCE. 32
In its decision 33 promulgated on 21 December 1979, the
respondent Court reversed the decision of the trial court, thus:
WHEREFORE, the judgment appealed from is REVERSED and
set aside, Plaintiff's complaint is dismissed with costs. Plaintiff
is ordered to pay defendant corporation P25,000.00
exemplary damages, and P10,000.00 attorney's fees.
SO ORDERED.
Such conclusion is based on its findings, to wit:
Before resolving the issue, it is helpful to bring out some
preliminary facts. First, the defendant corporation is
supervised and principally financed by the National
Investment and Development Corporation (NIDC), a subsidiary
investment of the Philippine National Bank (PNB), with cash
financial exposure of some P10,000,000.00. PNB is a
government financial institution whose Board is chairmaned
(sic) by the Minister of National Defense. This fact is very
material to the issue of whether defendant corporations
president can bind the corporation with his own act.
Second, for failure to deny under oath the following actionable
documents in support of defendant's counterclaim:
1.
The resolution contained in defendant's letter to
plaintiff dated July 5, 1973, on the 10,000 bags of white
cement delivered to plaintiff was not by reason of the letter
contract, Exhibit "A", which was totally disapproved by
defendant corporation's board of directors, clearly stating that
"If within ten (10) days from date hereof, we will not hear from
you but you will withdraw cement at P24.30 per bag from our
plant, then we will deposit your check of P243,000.00 dated
June 7, 1973 issued by the Producers Bank of the Philippines,
per instruction of the Board." (Annex "I" to defendant's
Answer).
2.
Letter of defendant to plaintiff dated August 4, 1973
that defendant "only committed to you and which you
accordingly paid 10,000 bags of white cement of which 4,150
bags were already delivered to you as of August 1, 1973"
(Annex "2" of defendant's Answer).
3.
Letter dated August 21, 1973 to plaintiff reiterating
defendant's letter of August 4, 1973 (Annex "3" to defendant's
Answer).
4.

Letter to stores dated August 21, 1973,

5.
Receipt from plaintiff (sic) P243,000.00 in payment of
10,000 bags of white cement at P24.30 per bag (Annex "5", to
defendant's Answer).
plaintiff is deemed to have admitted, not only the due
execution and genuiness (sic) of said documents, (Rule 8 Sec.
8, Rules of Court) but also the allegations therein (Rule 9, Sec.
1, Rules of Court). All of the foregoing documents tend to
prove that the letter-offer, Exhibit "A", was rejected by
defendant corporation's Board of Directors and plaintiff was
duly notified thereof and that the P243,000.00 check was
considered by both parties as payment of the 10,000 bags of
cement under a separate transaction. As proof of which
plaintiff did not complain nor protest until February 9, 1974,
when he threatened legal action.
Third,
Maglana's signing the letter-offer prepared for him in
the Solidbank was made clearly upon the condition that it was
subject to the approval of the board of directors of defendant
corporation. We find consistency herein because according to
the Corporation Law, and the By-Laws of defendant
corporation, all corporate commitments and business are
conducted by, and contracts entered into through, the express
authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I"
or "8").
Fourth, What Henry Yao and Maglana agreed upon as
embodied in Exhibit "A", insofar as defendant corporation is
concerned, was an unauthorized contract (Arts. 1317 and
1403 (1), Civil Code). And because Maglana was not
authorized by the Board of Directors of defendant corporation
nor was his, actuation ratified by the Board, the agreement is
unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs.
Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43
O-G. 3224).
While it may be true that Maglana is President of defendant
corporation nowhere in the Articles of Incorporation nor in the
By-Laws of said corporation was he empowered to enter into
any contract all by himself and bind the corporation without
first securing the authority and consent of the Board of
Directors. Whatever authority Maglana may have must be
derived from the Board of Directors of defendant corporation.
A corporate officers power as an agent must be sought from
the law, the articles of incorporation and the By-Laws or from
a resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227,
Board of Liquidators vs. Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment
appealed from is untenable. Having no cause of action against
defendant corporation, plaintiff is not entitled to any relief. We
see no justification, therefore, for the court a quo's awards in
its favor. . . . 34
Its motion for reconsideration having been denied by the
respondent Court in its resolution 35 dated 15 April 1980,
petitioner filed the instant petition based on the following
grounds:
1.
That the contract (Exh. "A") entered into by the
President and Chairman of the Board of Directors Constancio
B. Maglana in behalf of the respondent corporation binds the
said corporation.
2.
That the contract (Exh. "A") was never novated nor
superceded (sic) by a subsequent contract.
3.
That the option to renew the contract as contained in
Exhibit "A" is enforceable.
4.
That Sec. 8, Rule 8 of the Rules of Court only applies
when the adverse party appear (sic) to be a party to the
instrument but not to one who is not a party to the instrument
and Sec. 1, Rule 9 of the said Rules with regards (sic) to
denying under oath refers only to allegations of
usury. 36
We gave due course 37 to the petition after private
respondent filed its Comment 38 and required the parties to
submit simultaneously their Memoranda, which the parties
subsequently complied with. 39
Before going any further, this Court must first resolve an issue
which, although raised in the Answer of private respondent,
was neither pursued in its appeal before the respondent Court
nor in its Comment and Memorandum in this case. It also
eluded the attention of the trial court and the respondent
Court. The issue, which is of paramount importance, concerns
the lack of capacity of plaintiff/petitioner to sue. In the caption
of both the complaint and the instant petition, the plaintiff and
the petitioner, respectively, is:

YAO KA SIN TRADING,

owned and operated by
YAO KA SIN. 40
and is described in the body thereof as "a business concern of
single proprietorship owned and operated by Yao Ka Sin." 41
In the body of the petition, it is described as "a single
proprietorship business concern." 42 It also appears that, as
gathered from the decision of the trial court, no Yao Ka Sin
testified. Instead, one Henry Yao took the witness stand and
testified that he is the "manager of Yao Ka Sin Trading" and "it
was in representation of the plaintiff" that he signed Exhibit
"A" 43 Under Section 1, Rule 3 of the Rules of Court, only
natural or juridical persons or entities authorized by law may
be parties in a civil action. In Juasing Hardware vs. Mendoza,
44 this Court held that a single proprietorship is neither a
natural person nor a juridical person under Article 44 of the
Civil Code; it is not an entity authorized by law to bring suit in
court:
The law merely recognizes the existence of a sole
proprietorship as a form of business organization conducted
for profit by a single individual, and requires the proprietor or
owner thereof to secure licenses and permits, register the
business name, and pair taxes to the national government. It
does not vest juridical or legal personality upon the sole
proprietorship nor empower it to file or defend an action in
court. 45
Accordingly, the proper party plaintiff/petitioner should be YAO
KA SIN. 46
The complaint then should have been amended to implead
Yao Ka Sin as plaintiff in substitution of Yao Ka Sin Trading.
However, it is now too late in the history of this case to
dismiss this petition and, in effect, nullify all proceedings had
before the trial court and the respondent Court on the sole
ground of petitioner's lack of capacity to sue. Considering that
private respondent did not pursue this issue before the
respondent Court and this Court; that, as We held in Juasing,
the defect is merely formal and not substantial, and an
amendment to cure such defect is expressly authorized by
Section 4, Rule 10 of the Rules of Court which provides that
"[a] defect in the designation of the parties may be summarily
corrected at any stage of the action provided no prejudice is
caused thereby to the adverse party;" and that "[a] sole
proprietorship does not, of coarse, possess any juridical
personality separate and apart from the personality of the
owner of the enterprise and the personality of the persons
acting in the name of such proprietorship," 47 We hold and
declare that Yao Ka Sin should be deemed as the plaintiff in
Civil Case No. 5064 and the petitioner in the instant case. As
this Court stated nearly eighty (80) years ago in Alonso vs.
Villamor: 48
No one has been misled by the error in the name of the party
plaintiff. If we should by reason of this error send this case
back for amendment and new trial, there would be on the
retrial the same complaint, the same answer, the same
defense, the same interests, the same witnesses, and the
same evidence. The name of the plaintiff would constitute the
only difference between the old trial and the new. In our
judgment there is not enough in a name to justify such action.
And now to the merits of the petition.
The respondent Court correctly ruled that Exhibit "A" is not
binding upon the private respondent. Mr. Maglana, its
President and Chairman, was not empowered to execute it.
Petitioner, on the other hand, maintains that it is a valid
contract because the Maglana has the power to enter into
contracts for the corporation as implied from the following
provisions of the By-Laws of private respondent:
a)
The power of the Board of Directors to . . . enter into
(sic) agreement or contract of any kind with any person in the
name and for and in behalf of the corporation through its
President, subject only to the declared objects and purpose of
the corporation and the existing provisions of law. (Exhibit "8A"); and
b)
The power of the Chairman of the Board of Directors
to "execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation may enter
into" (Exhibit "I-1").
And even admitting, for the sake of argument, that Mr.
Maglana was not so authorized under the By-Laws, the private
respondent, pursuant to the doctrine laid down by this Court
in Francisco vs. Government Service Insurance
System 49 and Board of Liquidators vs. Kalaw, 50 is still
bound by his act for clothing him with apparent authority.

We are not persuaded.

Since a corporation, such as the private respondent, can act
only through its officers and agents, "all acts within the
powers of said corporation may be performed by agents of its
selection; and, except so far as limitations or restrictions may
be imposed by special charter, by-law, or statutory provisions,
the same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his
power to act for the corporation; and agents when once
appointed, or members acting in their stead, are subject to
the same rules, liabilities and incapacities as are agents of
individuals and private persons." 51 Moreover, " . . . a
corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent
that authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and
also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has
conferred. 52
While there can be no question that Mr. Maglana was an
officer the President and Chairman of private respondent
corporation at the time he signed Exhibit "A", the above
provisions of said private respondent's By-Laws do not in any
way confer upon the President the authority to enter into
contracts for the corporation independently, of the Board of
Directors. That power is exclusively lodged in the latter.
Nevertheless, to expedite or facilitate the execution of the
contract, only the President and not all the members of the
Board, or so much thereof as are required for the act shall
sign it for the corporation. This is the import of the words
through the president in Exhibit "8-A" and the clear intent of
the power of the chairman "to execute and sign for and in
behalf of the corporation all contracts and agreements which
the corporation may enter into" in Exhibit "I-1". Both powers
presuppose a prior act of the corporation exercised through
the Board of Directors. No greater power can be implied from
such express, but limited, delegated authority. Neither can it
be logically claimed that any power greater than that
expressly conferred is inherent in Mr. Maglana's position as
president and chairman of the corporation.
Although there is authority "that if the president is given
general control and supervision over the affairs of the
corporation, it will be presumed that he has authority to make
contract and do acts within the course of its ordinary
business," 53 We find such inapplicable in this case. We note
that the private corporation has a general manager who,
under its By-Laws has, inter alia, the following powers: "(a) to
have the active and direct management of the business and
operation of the corporation, conducting the same accordingly
to the order, directives or resolutions of the Board of Directors
or of the president." It goes without saying then that Mr.
Maglana did not have a direct and active and in the
management of the business and operations of the
corporation. Besides, no evidence was adduced to show that
Mr. Maglana had, in the past, entered into contracts similar to
that of Exhibit "A" either with the petitioner or with other
parties.
Petitioner's last refuge then is his alternative proposition,
namely, that private respondent had clothed Mr. Maglana with
the apparent power to act for it and had caused persons
dealing with it to believe that he was conferred with such
power. The rule is of course settled that "[a]lthough an officer
or agent acts without, or in excess of, his actual authority if he
acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting
him to appear as having such authority, the corporation is
bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an
officer is allowed to exercise a particular authority with
respect to the business, or a particular branch of it,
continuously and publicly, for a considerable time." 54 Also, "if
a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it,
the corporation will be estopped to deny that such apparent
authority in real, as to innocent third persons dealing in good
faith with such officers or agents." 55 This "apparent authority
may result from (1) the general manner, by which the
corporation holds out an officer or agent as having power to
act or, in other words, the apparent authority with which it
clothes him to act in general or (2) acquiescence in his acts of
a particular nature, with actual or constructive knowledge

thereof, whether within or without the scope of his ordinary

powers. 56
It was incumbent upon the petitioner to prove that indeed the
private respondent had clothed Mr. Maglana with the apparent
power to execute Exhibit "A" or any similar contract. This
could have been easily done by evidence of similar acts
executed either in its favor or in favor of other parties.
Petitioner miserably failed to do that. Upon the other hand,
private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being
approved by the Board of Directors; such approval may only
be given after the contract passes through, at least, the
comptroller, who is the NIDC representative, and the legal
counsel.
The cases then of Francisco vs. GSIS and Board of Liquidators
vs. Kalaw are hopelessly unavailing to the petitioner. In said
cases, this Court found sufficient evidence, based on the
conduct and actuations of the corporations concerned, of
apparent authority conferred upon the officer involved which
bound the corporations on the basis of ratification. In the first
case, it was established that the offer of compromise made by
plaintiff in the letter, Exhibit "A", was validly accepted by the
GSIS. The terms of the trial offer were clear, and over the
signature of defendant's general manager Rodolfo Andal,
plaintiff was informed telegraphically that her proposal had
been accepted. It was sent by the GSIS Board Secretary and
defendant did not disown the same. Moreover, in a letter
remitting the payment of P30,000 advanced by her father,
plaintiff quoted verbatim the telegram of acceptance. This
was in itself notice to the corporation of the terms of the
allegedly unauthorized telegram. Notwithstanding this notice,
GSIS pocketed the amount and kept silent about the telegram.
This Court then ruled that:
This silence, taken together with the unconditional acceptance
of three other subsequent remittances from plaintiff,
constitutes in itself a binding ratification of the original
agreement (Civil Code, Art. 1393).
Art. 1393.
Ratification may be effected expressly or
tactly it is understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract voidable
and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an
intention to waive his right
In the second case, this Court found:
In the case at bar, the practice of the corporation has been to
allow its general manager to negotiate and execute contracts
in its copra trading activities for and in NACOCO's behalf
without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on
all corporate contracts. But that board itself, by its acts and
through acquiescence, practically laid aside the by-laws
requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
The inevitable conclusion then is that Exhibit "A" is an
unenforceable contract under Article 1317 of the Civil Code
which provides as follows:
Art. 1317.
No one may contract in the name of another
without being authorized by the latter, or unless he has by law
a right to represent him.
A contract entered into in the name of another by one who
has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf
it, has been execrated, before it is revoked by the other
contracting party.
The second ground is based on a wrong premise. It assumes,
contrary to Our conclusion above, that Exhibit "A" is a valid
contract binding upon the private respondent. It was
effectively disapproved and rejected by the Board of Directors
which, at the same time, considered the amount of
P243,000.00 received Mr. Maglana as payment for 10,000
bags of white cement, treated as an entirely different
contract, and forthwith notified petitioner of its decision that
"If within ten (10) days from date hereof we will not hear from
you but you will withdraw cement at P24.30 per bag from our
plant, then we will deposit your check of P243,000.00 dated
June 7, 1973 issued by the Producers Bank of the Philippines,
per instruction of the Board." 57 Petitioner received the copy
of this notification and thereafter accepted without any
protest the Delivery Receipt covering the 10,000 bags and the

Official Receipt for the P243,000.00. The respondent Court

thus correctly ruled that petitioner had in fact agreed to a new
transaction involving only 10,000 bags of white cement.
The third ground must likewise fail. Exhibit "A" being
unenforceable, the option to renew it would have no leg to
stand on. The river cannot rise higher than its source. In any
event, the option granted in. this case is without any
consideration Article 1324 of the Civil Code expressly provides
that:
When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid
or promised.
while Article 1749 of the same Code provides:
A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the
price.
Accordingly, even if it were accepted, it can not validly bind
the private respondent. 58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
Sec. 8. How to contest genuineness of such documents
When an action or defense is founded upon a written
instrument, copied in or attached in the corresponding
pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to be
the facts; but this provision does not apply when the adverse
party does not appear, to be a party to the instrument or
when compliance with an order for an inspection of the
original instrument is refused.
It is clear that the petitioner is not a party to any of the
documents attached to the private respondent's Answer.
Thus, the above quoted rule is not applicable. 59 While the
respondent Court, erred in holding otherwise, the challenged
decision must, nevertheless, stand in view of the above
disquisitions on the first to the third grounds of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the
decision of respondent Court of Appeals in C.A. G.R. No.
61072-R promulgated on 21 December 1979.
Cost against the petitioner.
Gutierrez, Jr., Feliciano, Bidin and Romero, JJ., concur.

SECOND DIVISION

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY

GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE,
AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III,
ERIC ROXAS, in their capacities as members of the Board of
Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ,
Petitioners,

- versus -

VICTOR AFRICA,
G.R. No. 151969

Respondent.

Present:
QUISUMBING, J., Chairperson,
CARPIO-MORALES,
BRION,
DEL CASTILLO, and
ABAD, JJ.

Promulgated:

September 4, 2009
x
--------------------------------------------------------------------------------------------- x

DECISION
BRION, J.:
In this petition for review on certiorari,[1] the parties raise a
legal question on corporate governance: Can the members of
a corporations board of directors elect another director to fill
in a vacancy caused by the resignation of a hold-over
director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders

Meeting of petitioner Valle Verde Country Club, Inc. (VVCC),
the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan),
Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico,
and Ray Gamboa.[2] In the years 1997, 1998, 1999, 2000,
and 2001, however, the requisite quorum for the holding of
the stockholders meeting could not be obtained.
Consequently, the above-named directors continued to serve
in the VVCC Board in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position
as member of the VVCC Board. In a meeting held on October
6, 1998, the remaining directors, still constituting a quorum of
VVCCs nine-member board, elected Eric Roxas (Roxas) to fill in
the vacancy created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also
resigned as member of the VVCC Board. He was replaced by
Jose Ramirez (Ramirez), who was elected by the remaining
members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the
election of Roxas and Ramirez as members of the VVCC Board
with the Securities and Exchange Commission (SEC) and the

Regional Trial Court (RTC), respectively. The SEC case

questioning the validity of Roxas appointment was docketed
as SEC Case No. 01-99-6177. The RTC case questioning the
validity of Ramirez appointment was docketed as Civil Case
No. 68726.
In his nullification complaint[3] before the RTC, Africa alleged
that the election of Roxas was contrary to Section 29, in
relation to Section 23, of the Corporation Code of the
Philippines (Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock,
from among the members of the corporation, who shall hold
office for one (1) year until their successors are elected and
qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any
vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only for the unexpired term of his
predecessor in office. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintals election as

member of the VVCC Board in 1996, his [Makalintals] term as
well as those of the other members of the VVCC Board should
be considered to have already expired. Thus, according to
Africa, the resulting vacancy should have been filled by the
stockholders in a regular or special meeting called for that
purpose, and not by the remaining members of the VVCC
Board, as was done in this case.
Africa additionally contends that for the members to exercise
the authority to fill in vacancies in the board of directors,
Section 29 requires, among others, that there should be an
unexpired term during which the successor-member shall
serve. Since Makalintals term had already expired with the
lapse of the one-year term provided in Section 23, there is no
more unexpired term during which Ramirez could serve.
Through a partial decision[4] promulgated on January 23,
2002, the RTC ruled in favor of Africa and declared the
election of Ramirez, as Makalintals replacement, to the VVCC
Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003,
nullifying the election of Roxas as member of the VVCC Board,
vice hold-over director Dinglasan. While VVCC manifested its
intent to appeal from the SECs ruling, no petition was actually
filed with the Court of Appeals; thus, the appellate court
considered the case closed and terminated and the SECs
ruling final and executory.[5]
THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23,
2002 partial decision for being contrary to law and
jurisprudence. VVCC made a direct resort to the Court via a
petition for review on certiorari, claiming that the sole issue in
the present case involves a purely legal question.
As framed by VVCC, the issue for resolution is whether the
remaining directors of the corporations Board, still
constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to
fill in a vacancy created by the resignation of a hold-over
director is expressly granted to the remaining members of the
corporations board of directors.
Under the above-quoted Section 29 of the Corporation Code, a
vacancy occurring in the board of directors caused by the
expiration of a members term shall be filled by the
corporations stockholders. Correlating Section 29 with Section

23 of the same law, VVCC alleges that a members term shall

be for one year and until his successor is elected and
qualified; otherwise stated, a members term expires only
when his successor to the Board is elected and qualified.
Thus, until such time as [a successor is] elected or qualified in
an annual election where a quorum is present, VVCC contends
that the term of [a member] of the board of directors has yet
not expired.
As the vacancy in this case was caused by Makalintals
resignation, not by the expiration of his term, VVCC insists
that the board rightfully appointed Ramirez to fill in the
vacancy.
In support of its arguments, VVCC cites the Courts ruling in
the 1927 El Hogar[6] case which states:
Owing to the failure of a quorum at most of the general
meetings since the respondent has been in existence, it has
been the practice of the directors to fill in vacancies in the
directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in Article 71 of the
By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting.

holdover, longer) than the term for reasons within or beyond

the power of the incumbent.
Based on the above discussion, when Section 23[9] of the
Corporation Code declares that the board of directorsshall
hold office for one (1) year until their successors are elected
and qualified, we construe the provision to mean that the
term of the members of the board of directors shall be only for
one year; their term expires one year after election to the
office. The holdover period that time from the lapse of one
year from a members election to the Board and until his
successors election and qualification is not part of the
directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure.
Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies
that the office has a fixed term, which has expired, and the
incumbent is holding the succeeding term.[10]
After the lapse of one year from his election as member of the
VVCC Board in 1996, Makalintals term of office is deemed to
have already expired. That he continued to serve in the VVCC
Board in a holdover capacity cannot be considered as
extending his term. To be precise, Makalintals term of office
began in 1996 and expired in 1997, but, by virtue of the
holdover doctrine in Section 23 of the Corporation Code, he
continued to hold office until his resignation on November 10,
1998. This holdover period, however, is not to be considered
as part of his term, which, as declared, had already expired.

xxxx
Upon failure of a quorum at any annual meeting the
directorate naturally holds over and continues to function until
another directorate is chosen and qualified. Unless the law or
the charter of a corporation expressly provides that an office
shall become vacant at the expiration of the term of office for
which the officer was elected, the general rule is to allow the
officer to hold over until his successor is duly qualified. Mere
failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation. The
doctrine above stated finds expression in article 66 of the bylaws of the respondent which declares in so many words that
directors shall hold office "for the term of one year or until
their successors shall have been elected and taken possession
of their offices." xxx.
It results that the practice of the directorate of filling
vacancies by the action of the directors themselves is valid.
Nor can any exception be taken to the personality of the
individuals chosen by the directors to fill vacancies in the
body. [Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same
arguments that he did before the trial court.

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its

petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the
remaining directors of a corporations Board, still constituting a
quorum, can elect another director to fill in a vacancy caused
by the resignation of a hold-over director. The resolution of
this legal issue is significantly hinged on the determination of
what constitutes a directors term of office.
The holdover period is not part of the term of office of a
member of the board of directors
The word term has acquired a definite meaning in
jurisprudence. In several cases, we have defined term as the
time during which the officer may claim to hold the office as
of right, and fixes the interval after which the several
incumbents shall succeed one another.[7] The term of office is
not affected by the holdover.[8] The term is fixed by statute
and it does not change simply because the office may have
become vacant, nor because the incumbent holds over in
office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officers tenure
represents the term during which the incumbent actually
holds office. The tenure may be shorter (or, in case of

With the expiration of Makalintals term of office, a vacancy

resulted which, by the terms of Section 29[11] of the
Corporation Code, must be filled by the stockholders of VVCC
in a regular or special meeting called for the purpose. To
assume as VVCC does that the vacancy is caused by
Makalintals resignation in 1998, not by the expiration of his
term in 1997, is both illogical and unreasonable. His
resignation as a holdover director did not change the nature
of the vacancy; the vacancy due to the expiration of
Makalintals term had been created long before his resignation.
The powers of the corporations board of directors emanate
from its stockholders
VVCCs construction of Section 29 of the Corporation Code on
the authority to fill up vacancies in the board of directors, in
relation to Section 23 thereof, effectively weakens the
stockholders power to participate in the corporate governance
by electing their representatives to the board of directors. The
board of directors is the directing and controlling body of the
corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from
them. The board of directors, in drawing to themselves the
powers of the corporation, occupies a position of trusteeship
in relation to the stockholders, in the sense that the board
should exercise not only care and diligence, but utmost good
faith in the management of corporate affairs.[12]
The underlying policy of the Corporation Code is that the
business and affairs of a corporation must be governed by a
board of directors whose members have stood for election,
and who have actually been elected by the stockholders, on
an annual basis. Only in that way can the directors' continued
accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured.
The shareholder vote is critical to the theory that legitimizes
the exercise of power by the directors or officers over
properties that they do not own.[13]
This theory of delegated power of the board of directors
similarly explains why, under Section 29 of the Corporation
Code, in cases where the vacancy in the corporations board of
directors is caused not by the expiration of a members term,
the successor so elected to fill in a vacancy shall be elected
only for the unexpired term of the his predecessor in office.
The law has authorized the remaining members of the board
to fill in a vacancy only in specified instances, so as not to
retard or impair the corporations operations; yet, in
recognition of the stockholders right to elect the members of
the board, it limited the period during which the successor
shall serve only to the unexpired term of his predecessor in
office.
While the Court in El Hogar approved of the practice of the
directors to fill vacancies in the directorate, we point out that
this ruling was made before the present Corporation Code was
enacted[14] and before its Section 29 limited the instances
when the remaining directors can fill in vacancies in the
board, i.e., when the remaining directors still constitute a
quorum and when the vacancy is caused for reasons other

than by removal by the stockholders or by expiration of the

term.
It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term of
office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations
stockholders who shall possess the authority to fill in a
vacancy caused by the expiration of a members term.
As correctly pointed out by the RTC, when remaining members
of the VVCC Board elected Ramirez to replace Makalintal,
there was no more unexpired term to speak of, as Makalintals
one-year term had already expired. Pursuant to law, the
authority to fill in the vacancy caused by Makalintals leaving
lies with the VVCCs stockholders, not the remaining members
of its board of directors.
WHEREFORE, we DENY the petitioners petition for review on
certiorari, and AFFIRM the partial decision of the Regional Trial
Court, Branch 152, Manila, promulgated on January 23, 2002,
in Civil Case No. 68726. Costs against the petitioners.
SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CONCHITA CARPIO MORALES

Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

ROBERTO A. ABAD
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the
Division Chairpersons Attestation, it is hereby certified that
the conclusions in the above Decision were reached in
consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

FIRST DIVISION
[G.R. No. 128690. January 21, 1999]
ABS-CBN BROADCASTING CORPORATION, petitioners, vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING
CORP., VIVA PRODUCTIONS, INC., and VICENTE DEL ROSARIO,
respondents.
DECISION
DAVIDE, JR., C.J.:
In this petition for review on certiorari, petitioners ABS-CBN
Broadcasting Corp. (hereinafter ABS-CBN) seeks to reverse
and set aside the decision[1] of 31 October 1996 and the
resolution[2] of 10 March 1997 of the Court of Appeals in CAG.R. CV No. 44125. The former affirmed with modification the
decision[3] of 28 April 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 80, in Civil Case No. Q-12309. The latter
denied the motion to reconsider the decision of 31 October
1996.
The antecedents, as found by the RTC and adopted by the
Court of Appeals, are as follows:
In 1990, ABS-CBN and VIVA executed a Film Exhibition
Agreement (Exh. A) whereby Viva gave ABS-CBN an exclusive
right to exhibit some Viva films. Sometime in December 1991,
in accordance with paragraph 2.4 [sic] of said agreement
stating that1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) Viva films for TV telecast under such terms
as may be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by ABS-CBN from
the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN,
through its vice-president Charo Santos-Concio, a list of three
(3) film packages (36 title) from which ABS-CBN may exercise
its right of first refusal under the afore-said agreement (Exhs.
1 par. 2, 2, 2-A and 2-B Viva). ABS-CBN, however through Mrs.
Concio, can tick off only ten (10) titles (from the list) we can
purchase (Exh. 3 Viva) and therefore did not accept said list
(TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film
Maging Sino Ka Man.
For further enlightenment, this rejection letter dated January
06, 1992 (Exh 3 Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as
I would like to express my difficulty in recommending the
purchase of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we
can purchase. Please see attached. I hope you will understand
my position. Most of the action pictures in the list do not have
big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for
telecast several action pictures in our very first contract
because of the cheap production value of these movies as
well as the lack of big action stars. As a film producer, I am
sure you understand what I am trying to say as Viva produces
only big action pictures.
In fact, I would like to request two (2) additional runs for these
movies as I can only schedule them in out non-primetime
slots. We have to cover the amount that was paid for these
movies because as you very well know that non-primetime
advertising rates are very low. These are the unaired titles in
the first contract.
1.
2.
3.
4.
5.
6.
7.
8.

Kontra Persa [sic]

Raider Platoon
Underground guerillas
Tiger Command
Boy de Sabog
lady Commando
Batang Matadero
Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and
have been rejected because of the ruling of MTRCB to have
them aired at 9:00 p.m. due to their very adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages

please consider including all the other Viva movies produced
last year, I have quite an attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached
ABS-CBNs Ms. Concio, with a list consisting of 52 original
movie titles (i.e., not yet aired on television) including the 14
titles subject of the present case, as well as 104 re-runs
(previously aired on television) from which ABS-CBN may
choose another 52 titles, as a total of 156 titles, proposing to
sell to ABS-CBN airing rights over this package of 52 originals
and 52 re-runs for P60,000,000.00 of which P30,000,000.00
will be in cash and P30,000,000.00 worth of television spots
(Exh. 4 to 4-C Viva; 9 Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBNs
general manager, Eugenio Lopez III, met at the Tamarind Grill
Restaurant in Quezon City to discuss the package proposal of
VIVA. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CBN was granted exclusive
film rights to fourteen (14) films for a total consideration of
P36 million; that he allegedly put this agreement as to the
price and number of films in a napkin and signed it and gave
it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8,
1992). On the other hand. Del Rosario denied having made
any agreement with Lopez regarding the 14 Viva films; denied
the existence of a napkin in which Lopez wrote something;
and insisted that what he and Lopez discussed at the lunch
meeting was Vivas film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr.
Lopez promising [sic]to make a counter proposal which came
in the form of a proposal contract Annex C of the complaint
(Exh. 1 Viva; Exh C ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS
Senior vice-president for Finance discussed the terms and
conditions of Vivas offer to sell the 104 films, after the
rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his
secretary , a handwritten note from Ms. Concio, (Exh. 5 Viva),
which reads: Heres the draft of the contract. I hope you find
everything in order, to which was attached a draft exhibition
agreement (Exh. C ABS-CBN; Exh. 9 Viva p. 3) a counterproposal covering 53 films, 52 of which came from the list
sent by defendant Del Rosario and one film was added by Ms.
Concio, for a consideration of P35 million. Exhibit C provides
that ABS-CBN is granted film rights to 53 films and contains a
right of first refusal to 1992 Viva Films. The said counter
proposal was however rejected by Vivas Board of Directors [in
the] evening of the same day, April 7, 1992, as Viva would not
sell anything less than the package of 104 films for P60
million pesos (Exh. 9 Viva), and such rejection was relayed to
Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and
following several negotiations and meetings defendant Del
Rosario and Vivas President Teresita Cruz, in consideration of
P60 million, signed a letter of agreement dated April 24, 1992,
granting RBS the exclusive right to air 104 Viva-produced
and/or acquired films (Exh. 7-A - RBS; Exh. 4 RBS) including
the fourteen (14) films subject of the present case.[4]
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary
injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation[5] (hereafter
RBS), Viva Production (hereafter VIVA), and Vicente del
Rosario. The complaint was docketed as Civil Case No. Q-9212309.
On 28 May 1992, the RTC issued a temporary restraining
order[6] enjoining private respondents from proceeding with
the airing, broadcasting, and televising of the fourteen VIVA
films subject of the controversy, starting with the film Maging
Sino Ka Man, which was scheduled to be shown on private
respondent RBS channel 7 at seven oclock in the evening of
said date.
On 17 June 1992, after appropriate proceedings, the RTC
issued an order[7] directing the issuance of a writ of
preliminary injunction upon ABS-CBNs posting of a P35 million
bond. ABS-CBN moved for the reduction of the bond,[8] while
private respondents moved for reconsideration of the order
and offered to put up a counterbond.[9]

In the meantime, private respondents filed separate answer

with counterclaim.[10] RBS also set up a cross-claim against
VIVA.
On 3 August 1992, the RTC issued an order[11] dissolving the
writ of preliminary injunction upon the posting by RBS of a
P30 million counterbond to answer for whatever damages
ABS-CBN might suffer by virtue of such dissolution. However,
it reduced petitioners injunction bond to P15 million as a
condition precedent for the reinstatement of the writ of
preliminary injunction should private respondents be unable
to post a counterbond.
At the pre-trial[12] on 6 August 1992, the parties upon
suggestion of the court, agreed to explore the possibility of an
amicable settlement. In the meantime, RBS prayed for and
was granted reasonable time within which to put up a P30
million counterbond in the event that no settlement would be
reached.
As the parties failed to enter into an amicable settlement, RBS
posted on 1 October 1992 a counterbond, which the RTC
approved in its Order of 15 October 1992.[13]
On 19 October 1992, ABS-CBN filed a motion for
reconsideration[14] of the 3 August and 15 October 1992
Orders, which RBS opposed.[15]
On 29 October, the RTC conducted a pre-trial.[16]
Pending resolution of its motion for reconsideration, ABS-CBN
filed with the Court of Appeals a petition[17] challenging the
RTCs Order of 3 August and 15 October 1992 and praying for
the issuance of a writ of preliminary injunction to enjoin the
RTC from enforcing said orders. The case was docketed as CAG.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a
temporary restraining order[18] to enjoin the airing,
broadcasting, and televising of any or all of the films involved
in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision[19] dismissing the petition in CA-G.R. SP No. 29300
for being premature. ABS-CBN challenged the dismissal in a
petition for review filed with this Court on 19 January 1993,
which was docketed s G.R. No. 108363.
In the meantime the RTC received the evidence for the parties
in Civil Case No. Q-92-12309. Thereafter, on 28 April 1993, it
rendered a decision[20] in favor of RBS and VIVA and against
ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the
foregoing, judgment is rendered in favor of defendants and
against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the
following:
a) P107,727.00 the amount of premium paid by RBS to the
surety which issued defendants RBSs bond to lift the
injunction;
b) P191,843.00 for the amount of print advertisement for
Maging Sino Ka Man in various newspapers;
c) Attorneys fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For the defendant VIVA, plaintiff ABS-CBN is ordered to pay
P212,000.00 by way of reasonable attorneys fees.
(4) The cross-claim of defendant RBS against defendant VIVA
is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the
price and terms of the offer. The alleged agreement between
Lopez III and Del Rosario was subject to the approval of the
VIVA Board of Directors, and said agreement was disapproved
during the meeting of the Board on 7 April 1992. Hence, there
was no basis for ABS-CBNs demand that VIVA signed the 1992
Film Exhibition Agreement. Furthermore, the right of first
refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concios letter to Del

Rosario ticking off ten titles acceptable to them, which would

have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied[21] ABS-CBNs petition for
review in G.R. No. 108363, as no reversible error was
committed by the Court of Appeals in its challenged decision
and the case had become moot and academic in view of the
dismissal of the main action by the court a quo in its decision
of 28 April 1993.
Aggrieved by the RTCs decision, ABS-CBN appealed to the
Court of Appeals claiming that there was a perfected contract
between ABS-CBN and VIVA granting ABS-CBN the exclusive
right to exhibit the subject films. Private respondents VIVA and
Del Rosario also appealed seeking moral and exemplary
damages and additional attorneys fees.
In its decision of 31 October 1996, the Court of Appeals
agreed with the RTC that the contract between ABS-CBN and
VIVA had not been perfected, absent the approval by the VIVA
Board of Directors of whatever Del Rosario, its agent, might
have agreed with Lopez III. The appellate court did not even
believe ABS-CBNs evidence that Lopez III actually wrote down
such an agreement on a napkin, as the same was never
produced in court. It likewise rejected ABS-CBNs insistence on
its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true
that a Film Exhibition Agreement was entered into between
Appellant ABS-CBN and appellant VIVA under Exhibit A in 1990
and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) VIVA films for TV telecast under such terms
as may be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by ABS-CBN within
a period of fifteen (15) days from the actual offer in writing
(Records, p. 14).
[H]owever, it is very clear that said right of first refusal in
favor of ABS-CBN shall still be subjected to such terms as may
be agreed upon by the parties thereto, and that the said right
shall be exercised by ABS-CBN within fifteen (15) days from
the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit A on the right of first
refusal did not fix the price of the film right to the twenty-four
(24) films, nor did it specify the terms thereof. The same are
still left to be agreed upon by the parties.
In the instant case, ABS-CBNs letter of rejection Exhibit 3
(Records, p. 89) stated that it can only tick off ten (10) films,
and the draft contract Exhibit C accepted only fourteen (14)
films, while parag. 1.4 of Exhibit A speaks of the next twentyfour (24) films.
The offer of VIVA was sometime in December 1991, (Exhibits
2, 2-A, 2-B; Records, pp. 86-88; Decision, p. 11, Records, p.
1150), when the first list of VIVA films was sent by Mr. Del
Rosario to ABS-CBN. The Vice President of ABS-CBN, Mrs.
Charo Santos-Concio, sent a letter dated January 6, 1992
(Exhibit 3, Records, p. 89) where ABS-CBN exercised its right
of refusal by rejecting the offer of VIVA. As aptly observed by
the trial court, with the said letter of Mrs. Concio of January 6,
1992, ABS-CBN had lost its right of first refusal. And even if
We reckon the fifteen (15) day period from February 27, 1992
(Exhibit 4 to 4-C) when another list was sent to ABS-CBN after
the letter of Mrs. Concio, still the fifteen (15) day period within
which ABS-CBN shall exercise its right of first refusal has
already expired.[22]
Accordingly, respondent court sustained the award factual
damages consisting in the cost of print advertisements and
the premium payments for the counterbond, there being
adequate proof of the pecuniary loss which RBS has suffered
as a result of the filing of the complaint by ABS-CBN. As to the
award of moral damages, the Court of Appeals found
reasonable basis therefor, holding that RBSs reputation was
debased by the filing of the complaint in Civil Case No. Q-9212309 and by the non-showing of the film Maging Sino Ka
Man. Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for
the public good in view of the filing of the complaint despite
petitioners knowledge that the contract with VIVA had not
been perfected. It also upheld the award of attorneys fees,
reasoning that with ABS-CBNs act of instituting Civil Case No.
Q-92-12309, RBS was unnecessarily forced to litigate. The
appellate court, however, reduced the awards of moral
damages to P 2 million, exemplary damages to P2 million, and
attorneys fees to P500,000.00.

On the other hand, respondent Court of Appeals denied VIVA

and Del Rosarios appeal because it was RBS and not VIVA
which was actually prejudiced when the complaint was filed
by ABS-CBN.
Its motion for reconsideration having been denied, ABS-CBN
filed the petition in this case, contending that the Court of
Appeals gravely erred in
I
RULING THAT THERE WAS NO PERFECTED CONTRACT
BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONFERANCE OF EVIDENCE ADDUCED
BY PETITIONER TO THE CONTRARY.
II
IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN
FAVOR OF PRIVATE RESPONDENT RBS.
III
IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
IV
IN AWARDING ATORNEYS FEES OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list.
It insists that we give credence to Lopezs testimony that he
and Del Rosario met at the Tamarind Grill Restaurant,
discussed the terms and conditions of the second list (the
1992 Film Exhibition Agreement) and upon agreement
thereon, wrote the same on a paper napkin. It also asserts
that the contract has already been effective, as the elements
thereof, namely, consent, object, and consideration were
established. It then concludes that the Court of Appeals
pronouncements were not supported by law and
jurisprudence, as per our decision of 1 December 1995 in
Limketkai Sons Milling, Inc. v. Court of Appeals,[23] which
cited Toyota Shaw, Inc. v. Court of Appeals;[24] Ang Yu
Asuncion v. Court of Appeals,[25] and Villonco Realty
Company v. Bormaheco, Inc.[26]
Anent the actual damages awarded to RBS, ABS-CBN
disavows liability therefor. RBS spent for the premium on the
counterbond of its own volition in order to negate the
injunction issued by the trial court after the parties had
ventilated their respective positions during the hearings for
the purpose. The filing of the counterbond was an option
available to RBS, but it can hardly be argued that ABS-CBN
compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution of the
injunction; or if it was determined to put up a counterbond, it
could have presented a cash bond. Furthermore under Article
2203 of the Civil Code, the party suffering loss injury is also
required to exercise the diligence of a good father of a family
to minimize the damages resulting from the act or omission.
As regards the cost of print advertisements, RBS had not
convincingly established that this was a loss attributable to
the non-showing of Maging Sino Ka Man; on the contrary, it
was brought out during trial that with or without the case or
injunction, RBS would have spent such an amount to generate
interest in the film.
ABS-CBN further contends that there was no other clear basis
for the awards of moral and exemplary damages. The
controversy involving ABS-CBN and RBS did not in any way
originate from business transaction between them. The claims
for such damages did not arise from any contractual dealings
or from specific acts committed by ABS-CBN against RBS that
may be characterized as wanton, fraudulent, or reckless; they
arose by virtue only of the filing of the complaint. An award of
moral and exemplary damages is not warranted where the
record is bereft of any proof that a party acted maliciously or
in bad faith in filing an action.[27] In any case, free resort to
courts for redress of wrongs is a matter of public policy. The
law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial
for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the
matter, the case would lose ground.[28] One who, makes use
of his own legal right does no injury.[29] If damage results
from filing of the complaint, it is damnum absque injuria.[30]
Besides, moral damages are generally not awarded in favor of
a juridical person, unless it enjoys a good reputation that was
debased by the offending party resulting in social humiliation.
[31]

As regards the award of attorneys fees, ABS-CBN maintains

that the same had no factual, legal, or equitable justification.
In sustaining the trial courts award, the Court of Appeals acted
in clear disregard of the doctrine laid down in Buan v.
Camaganacan[32] that the text of the decision should state
the reason why attorneys fees are being awarded; otherwise,
the award should be disallowed. Besides, no bad faith has
been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that where no
sufficient showing of bad faith would be reflected in a partys
persistence in a case other than an erroneous conviction of
the righteousness of his cause, attorneys fees shall not be
recovered as cost.[33]
On the other hand, RBS asserts that there was no perfected
contract between ABS-CBN and VIVA absent meeting of minds
between them regarding the object and consideration of the
alleged contract. It affirms that ABS-CBNs claim of a right of
first refusal was correctly rejected by the trial court. RBS
insists the premium it had paid for the counterbond
constituted a pecuniary loss upon which it may recover. It was
obliged to put up the counterbond due to the injunction
procured by ABS-CBN. Since the trial court found that ABSCBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could
recover from ABS-CBN the premium paid on the counterbond.
Contrary to the claim of ABS-CBN, the cash bond would prove
to be more expensive, as the loss would be equivalent to the
cost of money RBS would forego in case the P30 million came
from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of
advertisements for the cancelled showing of the film Maging
Sino Ka Man because the print advertisements were out to
announce the showing on a particular day and hour on
Channel 7, i.e., in its entirety at one time, not as series to be
shown on a periodic basis. Hence, the print advertisements
were good and relevant for the particular date of showing, and
since the film could not be shown on that particular date and
hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that
ABS-CBN filed the case and secured injunctions purely for the
purpose of harassing and prejudicing RBS. Pursuant then to
Articles 19 and 21 of the Civil Code, ABS-CBN must be held
liable for such damages. Citing Tolentino,[34] damages may
be awarded in cases of abuse of rights even if the done is not
illicit, and there is abuse of rights where a plaintiff institutes
an action purely for the purpose of harassing or prejudicing
the defendant.
In support of its stand that a juridical entity can recover moral
and exemplary damages, private respondent RBS cited People
v. Manero,[35] where it was stated that such entity may
recover moral and exemplary damages if it has a good
reputation that is debased resulting in social humiliation. It
then ratiocinates; thus:
There can be no doubt that RBS reputation has been debased
by ABS-CBNs acts in this case. When RBS was not able to
fulfill its commitment to the viewing public to show the film
Maging Sino Ka Man on the scheduled dates and times (and
on two occasions that RBS advertised), it suffered serious
embarrassment and social humiliation. When the showing was
cancelled, irate viewers called up RBS offices and subjected
RBS to verbal abuse (Announce kayo ng announce, hindi ninyo
naman ilalabas, nanloloko yata kayo) (Exh. 3-RBS, par.3). This
alone was not something RBS brought upon itself. It was
exactly what ABS-CBN had planted to happen.
The amount of moral and exemplary damages cannot be said
to be excessive. Two reasons justify the amount of the award.
The first is that the humiliation suffered by RBS, is national in
extent. RBS operations as a broadcasting company is [sic]
nationwide. Its clientele, like that of ABS-CBN, consists of
those who own and watch television. It is not an exaggeration
to state, and it is a matter of judicial notice that almost every
other person in the country watches television. The
humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film,
Maging Sino Ka Man on May 28 and November 3, 1992 but did
not see it owing to the cancellation. Added to this are the
advertisers who had placed commercial spots for the telecast
and to whom RBS had a commitment in consideration of the
placement to show the film in the dates and times specified.
The second is that it is a competitor that caused RBS suffer
the humiliation. The humiliation and injury are far greater in
degree when caused by an entity whose ultimate business

objective is to lure customers (viewers in this case) away from

the competition.[36]
For their part, VIVA and Vicente del Rosario contend that the
findings of fact of the trial court and the Court of Appeals do
not support ABS-CBNs claim that there was a perfected
contract. Such factual findings can no longer be disturbed in
this petition for review under Rule 45, as only questions of law
can be raised, not questions of fact. On the issue of damages
and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was
a perfected contract between VIVA and ABS-CBN, and (2)
whether RBS is entitled to damages and attorneys fees. It may
be noted that that award of attorneys fees of P212,000 in
favor of VIVA is not assigned as another error.
I
The first issue should be resolved against ABS-CBN. A contract
is a meeting of minds between two persons whereby one
binds himself to give something or render some service to
another[37] for a consideration. There is no contract unless
the following requisites concur: (1) consent of the contracting
parties; (2) object certain which is the subject of the contract;
and (3) cause of the obligation, which is established.[38] A
contract undergoes three stages:
(a) preparation, conception, or generation, which is the period
of negotiation and bargaining, ending at the moment of
agreement of the parties;
(b) perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the contract;
and
(c) consummation or death, which is the fulfillment or
performance of the terms agreed upon in the contract.[39]
Contracts that are consensual in nature are perfected upon
mere meeting of the minds. Once there is concurrence
between the offer and the acceptance upon the subject
matter, consideration, and terms of payment a contract is
produced. The offer must be certain. To convert the offer into
a contract, the acceptance must be absolute and must not
qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the
proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which
is not exactly what is proposed in the offer, such acceptance
is not sufficient to generate consent because any modification
or variation from the terms of the offer annuls the offer.[40]
When Mr. Del Rosario of Viva met Mr. Lopez of ABS-CBN at the
Tamarind Grill on 2 April 1992 to discuss the package of films,
said package of 104 VIVA films was VIVAs offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN,
sent through Ms. Concio, counter-proposal in the form a draft
contract proposing exhibition of 53 films for a consideration of
P35 million. This counter-proposal could be nothing less than
the counter-offer of Mr. Lopez during his conference with Del
Rosario at Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVAs offer, for it was met by a counter-offer
which substantially varied the terms of the offer.
ABS-CBNs reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals[41] and Villonco Realty Company v. Bormaheco, Inc.,
[42] is misplaced. In these cases, it was held that an
acceptance may contain a request for certain changes in the
terms of the offer and yet be a binding acceptance as long as
it is clear that the meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request is
granted or not. This ruling was, however, reversed in the
resolution of 29 March 1996,[43] which ruled that the
acceptance of an offer must be unqualified and absolute, i.e.,
it must be identical in all respects with that of the offer so as
to produce consent or meetings of the minds.
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but
merely clarificatory of what had previously been agreed upon.
It cited the statement in Stuart v. Franklin Life Insurance Co.
[44] that a vendors change in a phrase of the offer to
purchase, which change does not essentially change the
terms of the offer, does not amount to a rejection of the offer
and the tender of a counter-offer.[45] However, when any of
the elements of the contract is modified upon acceptance,
such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance
of VIVAs offer hence, they underwent period of bargaining.

ABS-CBN then formalized its counter-proposals or counteroffer in a draft contract. VIVA through its Board of Directors,
rejected such counter-offer. Even if it be conceded arguendo
that Del Rosario had accepted the counter-offer, the
acceptance did not bind VIVA, as there was no proof
whatsoever that Del Rosario had the specific authority to do
so.
Under the Corporation Code,[46] unless otherwise provided by
said Code, corporate powers, such as the power to enter into
contracts, are exercised by the Board of Directors. However,
the Board may delegate such powers to either an executive
committee or officials or contracted managers. The
delegation, except for the executive committee, must be for
specific purposes.[47] Delegation to officers makes the latter
agents of the corporation; accordingly, the general rules of
agency as to the binding effects of their acts would apply.[48]
For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must
specially authorize them to do so. that Del Rosario did not
have the authority to accept ABS-CBNs counter-offer was best
evidenced by his submission of the draft contract to VIVAs
Board of Directors for the latters approval. In any event, there
was between Del Rosario and Lopez III no meeting of minds.
The following findings of the trial court are instructive:
A number of considerations militate against ABS-CBNs claim
that a contract was perfected at that lunch meeting on April
02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the
Tamarind Grill referred to the price and the number of films,
which he wrote on a napkin. However, Exhibit C contains
numerous provisions which were not discussed at the
Tamarind Grill, if Lopez testimony was to be believed nor
could they have been physically written on a napkin. There
was even doubt as to whether it was a paper napkin or cloth
napkin. In short what were written in Exhibit C were not
discussed, and therefore could not have been agreed upon, by
the parties. How then could this court compel the parties to
sign Exhibit C when the provisions thereof were not previously
agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the
subject matter of the contract was 14 films. The complaint in
fact prays for delivery of 14 films. But Exhibit C mentions 53
films as its subject matter. Which is which? If Exhibit C
reflected the true intent of the parties, then ABS-CBNs claim
for 14 films in its complaint is false or if what it alleged in the
complaint is true, then Exhibit C did not reflect what was
agreed upon by the parties. This underscores the fact that
there was no meeting of the minds as to the subject matter of
the contract, so as to preclude perfection thereof. For settled
is the rule that there can be no contract where there is no
object certain which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit
testimony (Exh. D) States:
We were able to reach an agreement. VIVA gave us the
exclusive license to show these fourteen (14) films, and we
agreed to pay Viva the amount of P16,050,000.00 as well as
grant Viva commercial slots worth P19,950,000.00. We had
already earmarked this P16,050,000.00.
which gives a total consideration of P36 million
(P19,951,000.00 plus P16,050,000.00 equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q What was written in this napkin?
A The total price, the breakdown the known Viva movies, the
7 blockbuster movies and the other 7 Viva movies because
the price was broken down accordingly. The none [sic] Viva
and the seven other Viva movies and the sharing between the
cash portion and the concerned spot portion in the total
amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens
ABS-CBNs claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she
transmitted Exhibit C to Mr. Del Rosario with a handwritten
note, describing said Exhibit C as a draft. (Exh. 5 Viva; tsn pp.
23-24, June 08, 1992). The said draft has a well defined
meaning.
Since Exhibit C is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and
conditions thereof could not have been previously agreed
upon by ABS-CBN and Viva. Exhibit C could not therefore

legally bind Viva, not having agreed thereto. In fact, Ms.

Concio admitted that the terms and conditions embodied in
Exhibit C were prepared by ABS-CBNs lawyers and there was
no discussion on said terms and conditions.
As the parties had not yet discussed the proposed terms and
conditions in Exhibit C, and there was no evidence whatsoever
that Viva agreed to the terms and conditions thereof, said
document cannot be a binding contract. The fact that Viva
refused to sign Exhibit C reveals only two [sic] well that it did
not agree on its terms and conditions, and this court has no
authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del
Rosario agreed upon at the Tamarind Grill was only
provisional, in the sense that it was subject to approval by the
Board of Directors of Viva. He testified:
Q Now, Mr. Witness, and after that Tamarinf meeting the
second meeting wherein you claimed that you have the
meeting of the minds between you and Mr. Vic del Rosario,
what happened?
A Vic Del Rosario was supposed to call us up and tell us
specifically the result of the discussion with the Board of
Directors.
Q And you are referring to the so-called agreement which you
wrote in [sic] a piece of paper?
A Yes, sir.
Q So, he was going to forward that to the board of Directors
for approval?
A Yes, sir (Tsn, pp. 42-43, June 8, 1992)
Q Did Mr. Del Rosario tell you that he will submit it to his
Board for approval?
A Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that
he knew Mr. Del Rosario had no authority to bind Viva to a
contract with ABS-CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that Mr. Del
Rosario is the Executive Producer of defendant Viva which is a
corporation. (par. 2, complaint). As a mere agent of Viva, Del
Rosario could not bind Viva unless what he did is ratified by its
Directors. (Vicente vs.Geraldez, 52 SCRA 210; Arnold vs.
Willets and Paterson, 44 Phil. 634). As a mere agent,
recognized as such by plaintiff, Del Rosario could not be held
liable jointly and severally with Viva and his inclusion as party
defendant has no legal basis. (Salonga vs. Warner Barnes
[sic],COLTA, 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the
complaint are clear admissions that what was supposed to
have been agreed upon at the Tamarind Grill between Mr.
Lopez and Del Rosario was not a binding agreement. It is as it
should be because corporate power to enter into a contract is
lodged in the Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board, whatever
agreement Lopez and Del Rosario arrived at could not ripen
into a valid binding upon Viva (Yao Ka Sin Trading vs. Court of
Appeals, 209 SCRA 763). The evidence adduced shows that
the Board of Directors of Viva rejected Exhibit C and insisted
that the film package for 104 films be maintained (Exh. 7-1
Cica).[49]
The contention that ABS-CBN had yet to fully exercise its right
of first refusal over twenty-four films under the 1990 Film
Exhibition Agreement and that the meeting between Lopez
and Del Rosario was a continuation of said previous contract is
untenable. As observed by the trial court, ABS-CBNs right of
first refusal had already been exercised when Ms. Concio
wrote to Viva ticking off ten films. Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months
after this letter was sent, was for an entirely different
package. Ms. Concio herself admitted on cross-examination to
having used or exercised the right of first refusal. She stated
that the list was not acceptable and was indeed not accepted
by ABS-CBN, (Tsn, June 8, 1992, pp. 8-10). Even Mr. Lopez
himself admitted that the right of first refusal may have been
already exercised by Ms. Concio (as she had). (TSN, June 8,
1992, pp. 71-75). Del Rosario himself knew and understand
[sic] that ABS-CBN has lost its right of first refusal when his list
of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11).[50]
II

However, we find for ABS-CBN on the issue of damages. We

shall first take up actual damages. Chapter 2, Title XVIII, Book
IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by
stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he
has duly proved.[51] The indemnification shall comprehend
not only the value of the loss suffered, but also that of the
profits that the obligee failed to obtain.[52] In contracts and
quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or
otherwise. In case of good faith, the damages recoverable are
those which are the natural and probable consequences of the
breach of the obligation and which the parties have foreseen
or could have reasonably foreseen at the time of the
constitution of the obligation. If the obligor acted with fraud,
bad faith, malice, or wanton attitude, he shall be responsible
for all damages which may be reasonably attributed to the
non-performance of the obligation.[53] In crimes and quasidelicts, the defendants shall be liable for all damages which
are the natural and probable consequences of the act or
omission complained of, whether or not such damages have
been foreseen or could have reasonably been foreseen by the
defendant.[54]
Actual damages may likewise be recovered for loss or
impairment of earning capacity in cases of temporary or
permanent personal injury, or for injury to the plaintiffs
business standing or commercial credit.[55]
The claim of RBS for actual damages did not arise from
contract, quasi-contract, delict, or quasi-delict. It arose from
the fact of filing of the complaint despite ABS-CBNs alleged
knowledge of lack of cause of action. Thus paragraph 12 of
RBSs Answer with Counterclaim and Cross-claim under the
heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has
no cause of action against RBS. As a result thereof, RBS
suffered actual damages in the amount of P6,621,195.32.[56]
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS
could only probably take refuge under Articles 19, 20, and 21
of the Civil Code, which read as follows:
ART. 19. Every person must, in the exercise of hid rights and in
the performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith.
ART. 20. Every person who, contrary to law, wilfully or
negligently causes damage to another shall indemnify the
latter for the same.
ART. 21. Any person who wilfully causes loss or injury to
another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage.
It may further be observed that in cases where a writ of
preliminary injunction is issued, the damages which the
defendant may suffer by reason of the writ are recoverable
from the injunctive bond.[57] In this case, ABS-CBN had not
yet filed the required bond; as a matter of fact, it asked for
reduction of the bond and even went to the Court of Appeals
to challenge the order on the matter. Clearly then, it was not
necessary for RBS to file a counterbond. Hence, ABS-CBN
cannot be held responsible for the premium RBS paid for the
counterbond.
Neither could ABS-CBN be liable for the print advertisements
for Maging Sino Ka Man for lack of sufficient legal basis. The
RTC issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that
there existed sufficient ground for the issuance thereof.
Notably, the RTC did not dissolve the injunction on the ground
of lack of legal and factual basis, but because of the plea of
RBS that it be allowed to put up a counterbond.
As regards attorneys fees, the law is clear that in the absence
of stipulation, attorneys fees may be recovered as actual or
compensatory damages under any of the circumstances
provided for in Article 2208 of the Civil Code.[58]
The general rule is that attorneys fees cannot be recovered as
part of damages because of the policy that no premium
should be placed on the right to litigate.[59] They are not to
be awarded every time a party wins a suit. The power of the
court t award attorneys fees under Article 2208 demands
factual, legal, and equitable justification.[60] Even when a
claimant is compelled to litigate with third persons or to incur
expenses to protect his rights, still attorneys fees may not be
awarded where no sufficient showing of bad faith could be

reflected in a partys persistence in a case other than an

erroneous conviction of the righteousness of his cause.[61]
As to moral damages the law is Section 1, Chapter 3, Title
XVIII, Book IV of the Civil Code. Article 2217 thereof defines
what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered. Article
2220 provides that moral damages may be recovered in
breaches of contract where the defendant acted fraudulently
or in bad faith. RBSs claim for moral damages could possibly
fall only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29,
30, 32, 34 and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered and not to
impose a penalty on the wrongdoer.[62] The award is not
meant to enrich the complainant at the expense of the
defendant, but to enable the injured party to obtain means,
diversion, or amusements that will serve to obviate the moral
suffering he has undergone. It is aimed at the restoration,
within the limits of the possible, of the spiritual status quo
ante, and should be proportionate to the suffering inflicted.
[63] Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained
and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption or the part of the trial court.
[64]
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no
emotions, no senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be experienced only
by one having a nervous system.[65] The statement in People
v. Manero[66] and Mambulao Lumber Co. v. PNB[67] that a
corporation may recover moral damages if it has a good
reputation that is debased, resulting in social humiliation is an
obiter dictum. On this score alone the award for damages
must be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5 Chapter 3,
Title XVIII, Book IV of the Civil Code. These are imposed by
way of example or correction for the public good, in addition
to moral, temperate, liquidated, or compensatory damages.
[68] They are recoverable in criminal cases as part of the civil
liability when the crime was committed with one or more
aggravating circumstances;[69] in quasi-delicts, if the
defendant acted with gross negligence;[70] and in contracts
and quasi-contracts, if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.[71]
It may be reiterated that the claim of RBS against ABS-CBN is
not based on contract, quasi-contract, delict, or quasi-delict.
Hence, the claims for moral and exemplary damages can only
be based on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the
following: (1) the existence of a legal right or duty, (2) which
is exercised in bad faith, and (3) for the sole intent of
prejudicing or injuring another. Article 20 speaks of the
general sanction for all provisions of law which do not
especially provide for their own sanction; while Article 21
deals with acts contra bonus mores, and has the following
elements: (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public
policy, and (3) and it is done with intent to injure.[72]
Verily then, malice or bad faith is at the core of Articles 19, 20,
and 21. Malice or bad faith implies a conscious and intentional
design to do a wrongful act for a dishonest purpose or moral
obliquity.[73] Such must be substantiated by evidence.[74]
There is no adequate proof that ABS-CBN was inspired by
malice or bad faith. It was honestly convinced of the merits of
its cause after it had undergone serious negotiations
culminating in its formal submission of a draft contract.
Settled is the rule that the adverse result of an action does
not per se make the action wrongful and subject the actor to
damages, for the law could not have meant impose a penalty
on the right to litigate. If damages result from a persons
exercise of a right, it is damnum absque injuria.[75]
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No. 44125 is
hereby REVERSED except as to unappealed award of
attorneys fees in favor of VIVA Productions, Inc.
No pronouncement as to costs.
SO ORDERED.

Melo, Kapunan, Martinez, and Pardo, JJ., concur.

SECOND DIVISION
[G.R. No. 96551. November 4, 1996]
PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE
COURT OF APPEALS and INTERNATIONAL CORPORATE BANK,
respondents.
PRINTLINE CORPORATION, petitioner, vs. THE COURT OF
APPEALS and INTERNATIONAL CORPORATE BANK,
respondents.
DECISION
TORRES, JR., J.:
Assailed in the instant petition for review is the decision[1] of
the Court of Appeals in CA-G.R. CV No. 16810 dated
September 28, 1990 which affirmed the trial courts dismissal
of petitioners complaint for damages.
The antecedents:
On July 18, 1986, Premium Marble Resources, Inc. (Premium
for brevity), assisted by Atty. Arnulfo Dumadag as counsel,
filed an action for damages against International Corporate
Bank which was docketed as Civil Case No. 14413. The
complaint states, inter alia:
3. Sometime in August to October 1982, Ayala Investment and
Development Corporation issued three (3) checks [Nos.
097088, 097414 & 27884] in the aggregate amount of
P31,663.88 payable to the plaintiff and drawn against
Citibank;
xxx
5. On or about August to October 1982, former officers of the
plaintiff corporation headed by Saturnino G. Belen, Jr., without
any authority whatsoever from the plaintiff deposited the
above-mentioned checks to the current account of his conduit
corporation, Intervest Merchant Finance (Intervest, for brevity)
which the latter maintained with the defendant bank under
account No. 0200-02027-8;
6. Although the checks were clearly payable to the plaintiff
corporation and crossed on their face and for payees account
only, defendant bank accepted the checks to be deposited to
the current account of Intervest and thereafter presented the
same for collection from the drawee bank which subsequently
cleared the same thus allowing Intervest to make use of the
funds to the prejudice of the plaintiff;
xxx
14. The plaintiff has demanded upon the defendant to
restitute the amount representing the value of the checks but
defendant refused and continue to refuse to honor plaintiffs
demands up to the present;
15. As a result of the illegal and irregular acts perpetrated by
the defendant bank, the plaintiff was damaged to the extent
of the amount of P31,663.88.
Premium prayed that judgment be rendered ordering
defendant bank to pay the amount of P31,663.88 representing
the value of the checks plus interest, P100,000.00 as
exemplary damages; and P30,000.00 as attorneys fees.

On the other hand, Siguion Reyna Law firm as counsel of

Premium in a rejoinder, asserted that it is the general
information sheet filed with the Securities and Exchange
Commission, among others, that is the best evidence that
would show who are the stockholders of a corporation and not
the Articles of Incorporation since the latter does not keep
track of the many changes that take place after new
stockholders subscribe to corporate shares of stocks.
In the interim, defendant bank filed a manifestation that it is
adopting in toto Premiums motion to dismiss and, therefore,
joins it in praying for the dismissal of the present case on the
ground that Premium lacks authority from its duly constituted
board of directors to institute the action.
In its Order, the lower court concluded that:
Considering that the officers (directors) of plaintiff corporation
enumerated in the Articles of Incorporation, filed on
November 9, 1979, were to serve until their successors are
elected and qualified and considering further that as of March
4, 1981, the officers of the plaintiff corporation were Alberto
Nograles, Fernando Hilario, Augusto Galace, Jose L.R. Reyes,
Pido Aguilar and Saturnino Belen, Jr., who presumably are the
officers represented by the Siguion Reyna Law Firm, and that
together with the defendants, they are moving for the
dismissal of the above-entitled case, the Court finds that the
officers represented by Atty. Dumadag do not as yet have the
legal capacity to sue for and in behalf of the plaintiff
corporation and/or the filing of the present action (Civil Case
14413) by them before Case No. 2688 of the SEC could be
decided is a premature exercise of authority or assumption of
legal capacity for and in behalf of plaintiff corporation.
The issues raised in Civil Case No. 14444 are similar to those
raised in Civil Case No. 14413. This Court is of the opinion that
before SEC Case No. 2688 could be decided, neither the set of
officers represented by Atty. Dumadag nor that set
represented by the Siguion Reyna, Montecillo and Ongsiako
Law Office, may prosecute cases in the name of the plaintiff
corporation.
It is clear from the pleadings filed by the parties in these two
cases that the existence of a cause of action against the
defendants is dependent upon the resolution of the case
involving intra-corporate controversy still pending before the
SEC.[3]
On appeal, the Court of Appeals affirmed the trial courts
Order[4] which dismissed the consolidated cases. Hence, this
petition.
Petitioner submits the following assignment of errors:
I
The Court of Appeals erred in giving due course to the motion
to dismiss filed by the Siguion Reyna Law Office when the said
motion is clearly filed not in behalf of the petitioner but in
behalf of the group of Belen who are the clients of the said
law office.
II

In its Answer International Corporate Bank alleged, inter alia,

that Premium has no capacity/personality/authority to sue in
this instance and the complaint should, therefore, be
dismissed for failure to state a cause of action.

The Court of Appeals erred in giving due course to the motion

to dismiss filed by the Siguion Reyna Law Office in behalf of
petitioner when the said law office had already appeared in
other cases wherein the petitioner is the adverse party.

A few days after Premium filed the said case, Printline

Corporation, a sister company of Premium also filed an action
for damages against International Corporate Bank docketed
as Civil Case No. 14444. Thereafter, both civil cases were
consolidated.

III

Meantime, the same corporation, i.e., Premium, but this time

represented by Siguion Reyna, Montecillio and Ongsiako Law
Office as counsel, filed a motion to dismiss on the ground that
the filing of the case was without authority from its duly
constituted board of directors as shown by the excerpt of the
minutes of the Premiums board of directors meeting.[2]

IV

In its opposition to the motion to dismiss, Premium thru Atty.

Dumadag contended that the persons who signed the board
resolution namely Belen, Jr., Nograles & Reyes, are not
directors of the corporation and were allegedly former officers
and stockholders of Premium who were dismissed for various
irregularities and fraudulent acts; that Siguion Reyna Law
office is the lawyer of Belen and Nograles and not of Premium
and that the Articles of Incorporation of Premium shows that
Belen, Nograles and Reyes are not majority stockholders.

The Court of Appeals erred when it ruled that undersigned

counsel was not authorized by the Board of Directors to file
Civil Case Nos. 14413 and 14444.

The Court of Appeals erred in concluding that under SEC Case

No. 2688 the incumbent directors could not act for and in
behalf of the corporation.
V
The Court of Appeals is without jurisdiction to prohibit the
incumbent Board of Directors from acting and filing this case
when the SEC where SEC Case No. 2688 is pending has not
even made the prohibition.
We find the petition without merit.

The only issue in this case is whether or not the filing of the
case for damages against private respondent was authorized
by a duly constituted Board of Directors of the petitioner
corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla,
Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and
Rodolfo Millare, presented the Minutes[5] of the meeting of its
Board of Directors held on April 1, 1982, as proof that the
filing of the case against private respondent was authorized
by the Board. On the other hand, the second set of officers,
viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R.
Reyes, presented a Resolution[6] dated July 30, 1986, to show
that Premium did not authorize the filing in its behalf of any
suit against the private respondent International Corporate
Bank.
Later on, petitioner submitted its Articles of Incorporation[7]
dated November 6, 1979 with the following as Directors: Mario
C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and
Jose Ma. Silva.
However, it appears from the general information sheet and
the Certification issued by the SEC on August 19, 1986[8] that
as of March 4, 1981, the officers and members of the board of
directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director
Saturnino G. Belen, Jr. Chairman of the Board.
While the Minutes of the Meeting of the Board on April 1, 1982
states that the newly elected officers for the year 1982 were
Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare,
petitioner failed to show proof that this election was reported
to the SEC. In fact, the last entry in their General Information
Sheet with the SEC, as of 1986 appears to be the set of
officers elected in March 1981.
We agree with the finding of public respondent Court of
Appeals, that in the absence of any board resolution from its
board of directors the [sic] authority to act for and in behalf of
the corporation, the present action must necessarily fail. The
power of the corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate
powers. Thus, the issue of authority and the invalidity of
plaintiff-appellants subscription which is still pending, is a
matter that is also addressed, considering the premises, to
the sound judgment of the Securities & Exchange
Commission.[9]
By the express mandate of the Corporation Code (Section 26),
all corporations duly organized pursuant thereto are required
to submit within the period therein stated (30 days) to the
Securities and Exchange Commission the names, nationalities
and residences of the directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26. Report of election of directors, trustees and officers.
Within thirty (30) days after the election of the directors,
trustees and officers of the corporation, the secretary, or any
other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and
residences of the directors, trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26
is to give the public information, under sanction of oath of
responsible officers, of the nature of business, financial
condition and operational status of the company together with
information on its key officers or managers so that those
dealing with it and those who intend to do business with it
may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility.
[10]
The claim, therefore, of petitioners as represented by Atty.
Dumadag, that Zaballa, et al., are the incumbent officers of
Premium has not been fully substantiated. In the absence of
an authority from the board of directors, no person, not even
the officers of the corporation, can validly bind the
corporation.[11]

We find no reversible error in the decision sought to be

reviewed.
ACCORDINGLY, for lack of merit, the petition is hereby
DENIED.
SO ORDERED.
Regalado (Chairman), Romero, Puno, and Mendoza, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40620 May 5, 1979
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A
RAMA, EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES
DE LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of
First Instance of Negros Occidental, Branch II, BENJAMIN
LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA
U. DACLES respondents.
Exequiel T. A Alejandro for petitioners.
Acua, Lirazan & Associates for private respondents.

CONCEPCION JR., J,:

Petition for certiorari to review the order of the respondent
judge, dated January 2, 1975, denying the petitioners' motion
to dismiss the complaint filed in Civil Case No. 10257 of the
Court of First Instance of Negros Occidental, entitled,
"Benjamin Lopue Sr., et al., plaintiffs, versus Ricardo Gamboa,
et al., defendants," as well as the order dated April 4, 1975,
denying the motion for the reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of
First Instance of Negros Occidental, the herein petitioners,
Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama,
Eduardo de la Rama, and the late Mercedes de la RamaBorromeo, now represented by her heirs, as well as Ramon de
la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi,
were sued by the herein private respondents, Benjamin
Lopue, Sr., Benjamin Lopue, Jr., Leonito Lopue, and Luisa U.
Dacles to nullify the issuance of 823 shares of stock of the
Inocentes de la Rama, Inc. in favor of the said defendants. The
gist of the complaint, filed on April 4, 1972, is that the
plaintiffs, with the exception of Anastacio Dacles who was
joined as a formal party, are the owners of 1,328 shares of
stock of the Inocentes de la Rama, Inc., a domestic
corporation, with an authorized capital stock of 3,000 shares,
with a par value of P100.00 per share, 2,177 of which were
subscribed and issued, thus leaving 823 shares unissued; that
upon the plaintiffs' acquisition of the shares of stock held by
Rafael Ledesma and Jose Sicangco, Jr., then President and
Vice-President of the corporation, respectively, the defendants
Mercedes R. Borromeo, Honorio de la Rama, and Ricardo
Gamboa, remaining members of the board of directors of the
corporation, in order to forestall the takeover by the plaintiffs
of the afore-named corporation, surreptitiously met and
elected Ricardo L. Gamboa and Honorio de la Rama as
president and vice-president of the corporation, respectively,
and thereafter passed a resolution authorizing the sale of the
823 unissued shares of the corporation to the defendants,
Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama,
Ramon de la Rama, Paz R. Battistuzzi Eduardo de la Rama,
and Mercedes R. Borromeo, at par value, after which the
defendants Honorio de la Rama, Lydia de la Rama-Gamboa,
and Enzo Battistuzzi were elected to the board of directors of
the corporation; that the sale of the unissued 823 shares of
stock of the corporation was in violation of the plaintiffs' and
pre-emptive rights and made without the approval of the
board of directors representing 2/3 of the outstanding capital
stock, and is in disregard of the strictest relation of trust
existing between the defendants, as stockholders thereof; and
that the defendants Lydia de la Rama-Gamboa, Honorio de la
Rama, and Enzo Battistuzzi were not legally elected to the
board of directors of the said corporation and has unlawfully
usurped or intruded into said office to the prejudice of the
plaintiffs. Wherefore, they prayed that a writ of preliminary
injunction be issued restraining the defendants from
committing, or continuing the performance of an act tending
to prejudice, diminish or otherwise injure the plaintiffs' rights
in the corporate properties and funds of the corporation, and
from disposing, transferring, selling, or otherwise impairing
the value of the 823 shares of stock illegally issued by the
defendants; that a receiver be appointed to preserve and
administer the property and funds of the corporation; that
defendants Lydia de la Rama-Gamboa, Honorio de la Rama,
and Enzo Battistuzzi be declared as usurpers or intruders into
the office of director in the corporation and, consequently,
ousting them therefrom and declare Luisa U. Dacles as a
legally elected director of the corporation; that the sale of 823
shares of stock of the corporation be declared null and void;

and that the defendants be ordered to pay damages and

attorney's fees, as well as the costs of suit . 1
Acting upon the complaint, the respondent judge, after proper
hearing, directed the clerk of court "to issue the
corresponding writ of preliminary injunction restraining the
defendants and/or their representatives, agents, or persons
acting in their behalf from the commission or continuance of
any act tending in any way to prejudice, diminish or otherwise
injure plaintiffs' rights in the corporate properties and funds of
the corporation Inocentes de la Rama, Inc.' and from
disposing, transferring, selling or otherwise impairing the
value of the certificates of stock allegedly issued illegally in
their names on February 11, 1972, or at any date thereafter,
and ordering them to deposit with the Clerk of Court the
corresponding certificates of stock for the 823 shares issued
to said defendants on February 11, 1972, upon plaintiffs'
posting a bond in the sum of P50,000.00, to answer for any
damages and costs that may be sustained by the defendants
by reason of the issuance of the writ, copy of the bond to be
furnished to the defendants. " 2 Pursuant thereto, the
defendants deposited with the clerk of court the corporation's
certificates of stock Nos. 80 to 86, inclusive, representing the
disputed 823 shares of stock of the corporation. 3
On October 31, 1972, the plaintiffs therein, now private
respondents, entered into a compromise agreement with the
defendants Ramon de la Rama, Paz de la Rama Battistuzzi and
Enzo Battistuzzi , 4 whereby the contracting parties withdrew
their respective claims against each other and the
aforenamed defendants waived and transferred their rights
and interests over the questioned 823 shares of stock in favor
of the plaintiffs, as follows:
3.
That the defendants Ramon L. de la Rama, Paz de la
Rama Battistuzzi and Enzo Battistuzzi will waive, cede,
transfer or other wise convey, as they hereby waive, cede,
transfer and convey, free from all liens and encumbrances
unto the plaintiffs, in such proportion as the plaintiffs may
among themselves determine, all of the rights, interests,
participations or title that the defendants Ramon L. de la
Rama, Paz de la Rama Battistuzzi Enzo Battistuzzi now have or
may have in the eight hundred twenty-three (823) shares in
the capital stock of the corporation INOCENTES DELA RAMA,
INC.' which were issued in the names of the defendants in the
above-entitled case on or about February 11, 1972, or at any
date thereafter and which shares are the subject-matter of the
present suit.
The compromise agreement was approved by the trial court
on December 4, 1972, 5 As a result, the defendants filed a
motion to dismiss the complaint, on November 19, 1974, upon
the grounds: (1) that the plaintiffs' cause of action had been
waived or abandoned; and (2) that they were estopped from
further prosecuting the case since they have, in effect,
acknowledged the validity of the issuance of the disputed 823
shares of stock. The motion was denied on January 2, 1975. 6
The defendants also filed a motion to declare the defendants
Ramon L. de la Rama, Paz de la Rama Battistuzzi and Enzo
Battistuzzi in contempt of court, for having violated the writ of
preliminary injunction when they entered into the aforesaid
compromise agreement with the plaintiffs, but the respondent
judge denied the said motion for lack of merit. 7
On February 10, 1975, the defendants filed a motion for the
reconsideration of the order denying their motion to dismiss
the complaint' and subsequently, an Addendum thereto,
claiming that the respondent court has no jurisdiction to
interfere with the management of the corporation by the
board of directors, and the enactment of a resolution by the
defendants, as members of the board of directors of the
corporation, allowing the sale of the 823 shares of stock to the
defendants was purely a management concern which the
courts could not interfere with. When the trial court denied
said motion and its addendum, the defendants filed the
instant petition for certiorari for the review of said orders.
The petition is without merit. The questioned order denying
the petitioners' motion to dismiss the complaint is merely
interlocutory and cannot be the subject of a petition for
certiorari. The proper procedure to be followed in such a case
is to continue with the trial of the case on the merits and, if
the decision is adverse, to reiterate the issue on appeal. It
would be a breach of orderly procedure to allow a party to
come before this Court every time an order is issued with
which he does not agree.
Besides, the order denying the petitioners' motion to dismiss
the complaint was not capriciously, arbitrarily, or whimsically
issued, or that the respondent court lacked jurisdiction over
the cause as to warrant the issuance of the writ prayed for. As

found by the respondent judge, the petitioners have not

waived their cause of action against the petitioners by
entering into a compromise agreement with the other
defendants in view of the express provision of the
compromise agreement that the same "shall not in any way
constitute or be considered a waiver or abandonment of any
claim or cause of action against the other defendants." There
is also no estoppel because there is nothing in the agreement
which could be construed as an affirmative admission by the
plaintiff of the validity of the resolution of the defendants
which is now sought to be judicially declared null and void.
The foregoing circumstances and the fact that no
consideration was mentioned in the agreement for the
transfer of rights to the said shares of stock to the plaintiffs
are sufficient to show that the agreement was merely an
admission by the defendants Ramon de la Rama, Paz de la
Rama Battistuzzi and Enzo Battistuzzi of the validity of the
claim of the plaintiffs.
The claim of the petitioners, in their Addendum to the motion
for reconsideration of the order denying the motion to dismiss
the complaint, questioning the trial court's jurisdiction on
matters affecting the management of the corporation, is
without merit. The well-known rule is that courts cannot
undertake to control the discretion of the board of directors
about administrative matters as to which they have legitimate
power of, 10 action and contracts intra vires entered into by
the board of directors are binding upon the corporation and
courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority. 11 In the instant
case, the plaintiffs aver that the defendants have concluded a
transaction among themselves as will result to serious injury
to the interests of the plaintiffs, so that the trial court has
jurisdiction over the case.
The petitioners further contend that the proper remedy of the
plaintiffs would be to institute a derivative suit against the
petitioners in the name of the corporation in order to secure a
binding relief after exhausting all the possible remedies
available within the corporation.
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. 12 In the case at bar,
however, the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the
corporation. At any rate, it is yet too early in the proceedings
since the issues have not been joined. Besides, misjoinder of
parties is not a ground to dismiss an action. 13
WHEREFORE, the petition should be, as it is hereby
DISMISSED for lack of merit. With costs against the
petitioners.
SO ORDERED.
Antonio, Aquino, Santos and Abad Santos JJ., concur.

SECOND DIVISION
[G.R. No. 125469. October 27, 1997]
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE
HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.
DECISION
TORRES, JR., J.:
The Securities and Exchange Commission is the government
agency, under the direct general supervision of the Office of
the President,[1] with the immense task of enforcing the
Revised Securities Act, and all other duties assigned to it by
pertinent laws. Among its inumerable functions, and one of
the most important, is the supervision of all corporations,
partnerships or associations, who are grantees or primary
franchise and/or a license or permit issued by the government
to operate in the Philippines.[2] Just how far this regulatory
authority extends, particularly, with regard to the Petitioner
Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review of Certiorari, petitioner assails the
resolution of the respondent Court of Appeals, dated June 27,
1996, which affirmed the decision of the Securities and
Exchange Commission ordering the petitioner Philippine Stock
Exchange, Inc. to allow the private respondent Puerto Azul
Land, Inc. to be listed in its stock market, thus paving the way
for the public offering of PALIs shares.
The facts of the case are undisputed, and are hereby restated
in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public in
order to raise funds allegedly to develop its properties and
pay its loans with several banking institutions. In January,
1995, PALI was issued a Permit to Sell its shares to the public
by the Securities and Exchange Commission (SEC). To
facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the
Philippine Stock Exchange, Inc. (PSE), for which purpose it
filed with the said stock exchange an application to list its
shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon
a perusal of PALIs application, recommended to the PSEs
Board of Governors the approval of PALIs listing application.
On February 14, 1996, before it could act upon PALIs
application, the Board of Governors of PSE received a letter
from the heirs of Ferdinand E. Marcos, claiming that the late
President Marcos was the legal and beneficial owner of certain
properties forming part of the Puerto Azul Beach Hotel and
Resort Complex which PALI claims to be among its assets and
that the Ternate Development Corporation, which is among
the stockholders of PALI, likewise appears to have been held
and continue to be held in trust by one Rebecco Panlilio for
then President Marcos and now, effectively for his estate, and
requested PALIs application to be deferred. PALI was
requested to comment upon the said letter.
PALIs answer stated that the properties forming part of Puerto
Azul Beach Hotel and Resort Complex were not claimed by
PALI as its assets. On the contrary, the resort is actually
owned by Fantasia Filipina Resort, Inc. and the Puerto Azul
Country Club, entities distinct from PALI. Furthermore, the
Ternate Development Corporation owns only 1.20% of PALI.
The Marcoses responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and Resort
Complex, thereby implying that they are also asserting legal
and beneficial ownership of other properties titled under the
name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol
Gunigundo of the Presidential Commission on Good
Government (PCGG) requesting for comments on the letter of
the PALI and the Marcoses. On March 4, 1996, the PSE was
informed that the Marcoses received a Temporary Restraining
Order on the same date, enjoining the Marcoses from, among
others, further impeding, obstructing, delaying or interfering
in any manner by or any means with the consideration,
processing and approval by the PSE of the initial public
offering of PALI. The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil
Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of
Governors of the PSE reached its decision to reject PALIs
application, citing the existence of serious claims, issues and
circumstances surrounding PALIs ownership over its assets
that adversely affect the suitability of listing PALIs shares in
the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to

the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to
the SECs attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE,
and requesting that the SEC, in the exercise of its supervisory
and regulatory powers over stock exchanges under Section
6(j) of P.D. No. 902-A, review the PSEs action on PALIs listing
application and institute such measures as are just and proper
and under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the
PSE, attaching thereto the letter of PALI and directing the PSE
to file its comments thereto within five days from its receipt
and for its authorized representative to appear for an inquiry
on the matter. On April 22, 1996, the PSE submitted a letter to
the SEC containing its comments to the April 11, 1996 letter
of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the
PSEs decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the
Commissioners authority and jurisdiction under Section 3 of
the Revised Securities Act, in conjunction with Section 3, 6(j)
and 6(m) of the Presidential Decree No. 902-A, the decision of
the Board of Governors of the Philippine Stock Exchange
denying the listing of shares of Puerto Azul Land, Inc., is
hereby set aside, and the PSE is hereby ordered to
immediately cause the listing of the PALI shares in the
Exchange, without prejudice to its authority to require PALI to
disclose such other material information it deems necessary
for the protection of the investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on
April 29, 1996, which was, however denied by the Commission
in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to consider its order dated April 24, 1996,
and in the light of recent developments on the adverse claim
against the PALI properties, PSE should require PALI to submit
full disclosure of material facts and information to protect the
investing public. In this regard, PALI is hereby ordered to
amend its registration statements filed with the Commission
to incorporate the full disclosure of these material facts and
information.
Dissatisfied with this ruling, the PSE filed with the Court of
Appeals on May 17, 1996 a Petition for Review (with
application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of
the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER
TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE
DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY
AND ABUSIVE MANNER IN DISAPPROVING PALIS LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID
FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN
CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY
PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION
IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for
Review and subsequently, a Comment and Motion to Dismiss.
On June 10, 1996, PSE filed its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its
Resolution dismissing the PSEs Petition for Review. Hence, this
Petition by the PSE.
The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the decision of the
petitioner PSE, pursuant to Section 3[3] of the Revised

Securities Act in relation to Section 6(j) and 6(m)[4] of P.D. No.

902-A, and Section 38(b)[5] of the Revised Securities Act, and
for the purpose of ensuring fair administration of the
exchange. Both as a corporation and as a stock exchange, the
petitioner is subject to public respondents jurisdiction,
regulation and control. Accepting the argument that the public
respondent has the authority merely to supervise or regulate,
would amount to serious consequences, considering that the
petitioner is a stock exchange whose business is impressed
with public interest. Abuse is not remote if the public
respondent is left without any system of control. If the
securities act vested the public respondent with jurisdiction
and control over all corporations; the power to authorize the
establishment of stock exchanges; the right to supervise and
regulate the same; and the power to alter and supplement
rules of the exchange in the listing or delisting of securities,
then the law certainly granted to the public respondent the
plenary authority over the petitioner; and the power of review
necessarily comes within its authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SECs ruling to the
effect that:
x x x the Philippine Stock Exchange has acted in an arbitrary
and abusive manner in disapproving the application of PALI for
listing of its shares in the face of the following considerations:
1. PALI has clearly and admittedly complied with the Listing
Rules and full disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as compared to
the IPOs of other companies similarly that were allowed listing
in the Exchange;
3. It appears that the claims and issues on the title to PALIs
properties were even less serious than the claims against the
assets of the other companies in that, the assertions of the
Marcoses that they are owners of the disputed properties
were not substantiated enough to overcome the strength of a
title to properties issued under the Torrens System as
evidence of ownership thereof;
4. No action has been filed in any court of competent
jurisdiction seeking to nullify PALIs ownership over the
disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import
of PSEs decision in denying PALIs application is that it would
be PALI, not the Marcoses, that must go to court to prove the
legality of its ownership on these properties before its shares
can be listed.
In addition, the argument that the PALI properties belong to
the Military/Naval Reservation does not inspire belief. The
point is, the PALI properties are now titled. A property losses
its public character the moment it is covered by a title. As a
matter of fact, the titles have long been settled by a final
judgment; and the final decree having been registered, they
can no longer be re-opened considering that the one year
period has already passed. Lastly, the determination of what
standard to apply in allowing PALIs application for listing,
whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to the
Securities Commission, it being the government agency that
exercises both supervisory and regulatory authority over all
corporations.
On August 15, 1996, the PSE, after it was granted an
extension, filed an instant Petition for Review on Certiorari,
taking exception to the rulings of the SEC and the Court of
Appeals. Respondent PALI filed its Comment to the petition on
October 17, 1996. On the same date, the PCGG filed a Motion
for Leave to file a Petition for Intervention. This was followed
up by the PCGGs Petition for Intervention on October 21,
1996. A supplemental Comment was filed by PALI on October
25, 1997. The Office of the Solicitor General, representing the
SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGGs motion for leave
to file petition for intervention, PALI filed its Comment thereto
on January 17, 1997, whereas the PSE filed its own Comment
on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to
the comments of respondent PALI (October 17, 1996) and the
Solicitor General (December 26, 1996). On may 16, 1997, PALI
filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the
SEC had authority to order the PSE to list the shares of PALI in
the stock exchange. Under presidential decree No. 902-A, the

powers of the SEC over stock exchanges are more limited as

compared to its authority over ordinary corporations. In
connection with this, the powers of the SEC over stock
exchanges under the Revised Securities Act are specifically
enumerated, and these do not include the power to reverse
the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the countrys
security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges,
which in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock to the
public through the stock exchange. This is in accord with the
business judgment rule whereby the SEC and the courts are
barred from intruding into business judgments of
corporations, when the same are made in good faith. The said
rule precludes the reversal of the decision of the PSE to deny
PALIs listing application, absent a showing a bad faith on the
part of the PSE. Under the listing rule of the PSE, to which PALI
had previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing. Thus,
even if an issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or reject
the issuers listing application if the PSE determines that the
listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over
sequestered corporations, nor with corporations whose
properties are under sequestration. A reading of Republic of
the Philippines vs. Sandiganbayan, G.R. No. 105205, 240
SCRA 376, would reveal that the properties of PALI, which
were derived from the Ternate Development Corporation
(TDC) and the Monte del Sol Development Corporation
(MSDC), are under sequestration by the PCGG, and the
subject of forfeiture proceedings in the Sandiganbayan. This
ruling of the Court is the law of the case between the Republic
and the TDC and MSDC. It categorically declares that the
assets of these corporations were sequestered by the PCGG
on March 10, 1986 and April 4, 1988.
It is, likewise, intimidated that the Court of Appeals sanction
that PALIs ownership over its properties can no longer be
questioned, since certificates of title have been issued to PALI
and more than one year has since lapsed, is erroneous and
ignores well settled jurisprudence on land titles. That a
certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and
admits certain exceptions. It is fundamental that forest lands
or military reservations are non-alienable. Thus, when a title
covers a forest reserve or a government reservation, such title
is void.
PSE, likewise, assails the SECs and the Court of Appeals
reliance on the alleged policy of full disclosure to uphold the
listing of the PALIs shares with the PSE, in the absence of a
clear mandate for the effectivity of such policy. As it is, the
case records reveal the truth that PALI did not comply with the
listing rules and disclosure requirements. In fact, PALIs
documents supporting its application contained
misrepresentations and misleading statements, and
concealed material information. The matter of sequestration
of PALIs properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALIs
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the marking of
a corporate entity, its functions as the primary channel
through which the vessels of capital trade ply. The PSEs
relevance to the continued operation and filtration of the
securities transactions in the country gives it a distinct color
of importance such that government intervention in its affairs
becomes justified, if not necessary. Indeed, as the only
operational stock exchange in the country today, the PSE
enjoys a monopoly of securities transactions, and as such, it
yields an immense influence upon the countrys economy.
Due to this special nature of stock exchanges, the countrys
lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges.[6]
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the affairs
of stock exchanges so that the interests of the investing
public may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is
enough authority to uphold the SECs challenged control
authority over the petitioner PSE even as it provides that the
Commission shall have absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations,

who are the grantees of primary franchises and/or a license or

permit issued by the government to operate in the Philippines
The SECs regulatory authority over private corporations
encompasses a wide margin of areas, touching nearly all of a
corporations concerns. This authority springs from the fact
that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SECs power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as necessary
or incidental to the carrying out of the SECs express power to
insure fair dealing in securities traded upon a stock exchange
or to ensure the fair administration of such exchange.[7] It is,
likewise, observed that the principal function of the SEC is the
supervision and control over corporations, partnerships and
associations with the end in view that investment in these
entities may be encouraged and protected, and their activities
pursued for the promotion of economic development.[8]
Thus, it was in the alleged exercise of this authority that the
SEC reversed the decision of the PSE to deny the application
for listing in the stock exchange of the private respondent
PALI. The SECs action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange. This
is in line with the SECs mission to ensure proper compliance
with the laws, such as the Revised Securities Act and to
regulate the sale and disposition of securities in the country.
[9] As the appellate court explains:
Paramount policy also supports the authority of the public
respondent to review petitioners denial of the listing. Being a
stock exchange, the petitioner performs a function that is vital
to the national economy, as the business is affected with
public interest. As a matter of fact, it has often been said that
the economy moves on the basis of the rise and fall of stocks
being traded. By its economic power, the petitioner certainly
can dictate which and how many users are allowed to sell
securities thru the facilities of a stock exchange, if allowed to
interpret its own rules liberally as it may please. Petitioner can
either allow or deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied by control,
becomes subject to abuse; hence, considering public interest,
then it should be subject to government regulation.
The role of the SEC in our national economy cannot be
minimized. The legislature, through the Revised Securities Act,
Presidential Decree No. 902-A, and other pertinent laws, has
entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not
otherwise vested in some other government office.[10]
This is not to say, however, that the PSEs management
prerogatives are under the absolute control of the SEC. The
PSE is, after all, a corporation authorized by its corporate
franchise to engage in its proposed and duly approved
business. One of the PSEs main concerns, as such, is still the
generation of profit for its stockholders. Moreover, the PSE has
all the rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to enter
(or not to enter) into contracts with third persons, and to
perform all other legal acts within its allocated express or
implied powers.
A corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a
distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites
appropriate to such body.[11] As to its corporate and
management decisions, therefore, the state will generally not
interfere with the same. Questions of policy and of
management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority
to substitute their judgment for the judgment of the board of
directors. The board is the business manager of the
corporation, and so long as it acts in good faith, its orders are
not reviewable by the courts.[12]
Thus, notwithstanding the regulatory power of the SEC over
the PSE, and the resultant authority to reverse the PSEs
decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSEs judgment is
attended by bad faith. In board of Liquidators vs. Kalaw,[13] it
was held that bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or some moral
obliquity and conscious doing of wrong. It means a breach of a
known duty through some motive or interest of ill will,
partaking of the nature of fraud.

In reaching its decision to deny the application for listing of

PALI, the PSE considered important facts, which in the general
scheme, brings to serious question the qualification of PALI to
sell its shares to the public through the stock exchange.
During the time for receiving objections to the application, the
PSE heard from the representative of the late President
Ferdinand E. Marcos and his family who claim the properties of
the private respondent to be part of the Marcos estate. In
time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI,
and suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC
and MSDC to Rebecco Panlilio, and to the private respondent
PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to
serious doubt as to the integrity of PALI as a stock issuer. The
petitioner was in the right when it refused application of PALI,
for a contrary ruling was not to the best interest of the
general public. The purpose of the Revised Securities Act,
after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false
promises, and the imposition of worthless ventures.[14]
It is to be observed that the U.S. Securities Act emphasized its
avowed protection to acts detrimental to legitimate business,
thus:
The Securities Act, often referred to as the truth in securities
Act, was designed not only to provide investors with adequate
information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to
obtain capital through honest presentation against
competition form crooked promoters and to prevent fraud in
the sale of securities. (Tenth Annual Report, U.S. Securities
and Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly
(1) prevention of excesses and fraudulent transactions,
merely by requirement of that details be revealed; (2) placing
the market during the early stages of the offering of a security
a body of information, which operating indirectly through
investment services and expert investors, will tend to produce
a more accurate appraisal of a security. x x x. Thus, the
Commission may refuse to permit a registration statement to
become effective if it appears on its face to be incomplete or
inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to
include any untrue statement of a material fact or to omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(Idem).
Also, as the primary market for securities, the PSE has
established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard of
propriety in the entities who choose to transact through its
facilities. It was reasonable for PSE, therefore, to exercise its
judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public
welfare is safeguarded.
In this connection, it is proper to observe that the concept of
government absolutism in a thing of the past, and should
remain so.
The observation that the title of PALI over its properties is
absolute and can no longer be assailed is of no moment. At
this juncture, there is the claim that the properties were
owned by the TDC and MSDC and were transferred in violation
of sequestration orders, to Rebecco Panlilio and later on to
PALI, besides the claim of the Marcoses that such properties
belong to Marcos estate, and were held only in trust by
Rebecco Panlilio. It is also alleged by the petitioner that these
properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established
to be true, the certificates of title over the subject properties
now held by PALI may be disregarded, as it is an established
rule that a registration of a certificate of title does not confer
ownership over the properties described therein to the person
named as owner. The inscription in the registry, to be
effective, must be made in good faith. The defense of
indefeasibility of a Torrens Title does not extend to a
transferee who takes the certificate of title with notice of a
flaw.
In any case, for the purpose of determining whether PSE acted
correctly in refusing the application of PALI, the true
ownership of the properties of PALI need not be determined as
an absolute fact. What is material is that the uncertainty of
the properties ownership and alienability exists, and this puts

to question the qualification of PALIs public offering. In sum,

the Court finds that the SEC had acted arbitrarily in arrogating
unto itself the discretion of approving the application for
listing in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a
corporate entity, whose business judgments are respected in
the absence of bad faith.
The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the SEC is
not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In
mandating the SEC to administer the Revised Securities Act,
and in performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives the SEC
the power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement
of the said laws. The second paragraph of Section 4 of the
said law, on the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold, transferred or
in any other manner conveyed to the public, unless registered
in accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A,
on the other hand, provides that the SEC, as regulatory
agency, has supervision and control over all corporations and
over the securities market as a whole, and as such, is given
ample authority in determining appropriate policies. Pursuant
to this regulatory authority, the SEC has manifested that it
has adopted the policy of full material disclosure where all
companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the
protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with
this, a fact is deemed material if it tends to induce or
otherwise effect the sale or purchase of its securities.[15]
While the employment of this policy is recognized and
sanctioned by laws, nonetheless, the Revised Securities Act
sets substantial and procedural standards which a proposed
issuer of securities must satisfy.[16] Pertinently, Section 9 of
the Revised Securities Act sets forth the possible Grounds for
the Rejection of the registration of a security:
- - The Commission may reject a registration statement and
refuse to issue a permit to sell the securities included in such
registration statement if it finds that - (1) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material facts
required to be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant - (i) is not solvent or not is sound financial condition;
(ii) has violated or has not complied with the provisions of this
Act, or the rules promulgated pursuant thereto, or any order
of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in the
public interest and for the protection of investors, impose
before the security can be registered;
(iv) had been engaged or is engaged or is about to engaged in
fraudulent transactions;
(v) is in any was dishonest of is not of good repute; or
(vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary or
government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to
be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or principal
stockholder of the issuer is disqualified to such officer,
director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction
of the Commission that the sale of its security would not work
to the prejudice to the public interest or as a fraud upon the
purchaser or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the
lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the

Securities and Exchange Commission. This measure was

meant to protect the interest of the investing public against
fraudulent and worthless securities, and the SEC is mandated
by law to safeguard these interests, following the policies and
rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is,
therefore, untenable. At it is, the Court finds that the private
respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares with
unfailing clarity, thereby lending support to the conclusion
that the PSE acted correctly in refusing the listing of PALI in its
stock exchange. This does not discount the effectivity of
whatever method the SEC, in the exercise of its vested
authority, chooses in setting the standard for public offerings
of corporations wishing to do so. However, the SEC must
recognize and implement the mandate of the law, particularly
the Revised Securities Act, the provisions of which cannot be
amended or supplanted my mere administrative issuance.
In resum, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is
justified by the law and by the circumstances attendant to this
case.
ACCORDINGLY, in view of the foregoing considerations, the
Court hereby GRANTS the Petition for Review on Certiorari.
The decisions of the Court of Appeals and the Securities and
Exchage Commission dated July 27, 1996 and April 24, 1996,
respectively, are hereby REVERSED and SET ASIDE, and a new
Judgment is hereby ENTERED, affirming the decision of the
Philippine Stock Exchange to deny the application for listing of
the private respondent Puerto Azul Land, Inc.
SO ORDERED.
Regalado (Chairman) and Puno, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18805

August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE

GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, plaintiffappellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE
DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL,
defendants-appellees.
Simeon M. Gopengco and Solicitor General for plaintiffappellant.
L. H. Hernandez, Emma Quisumbing, Fernando and
Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and
Belo for defendants-appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was
chartered as a non-profit governmental organization on May
7, 1940 by Commonwealth Act 518 avowedly for the
protection, preservation and development of the coconut
industry in the Philippines. On August 1, 1946, NACOCO's
charter was amended [Republic Act 5] to grant that
corporation the express power "to buy, sell, barter, export,
and in any other manner deal in, coconut, copra, and
dessicated coconut, as well as their by-products, and to act as
agent, broker or commission merchant of the producers,
dealers or merchants" thereof. The charter amendment was
enacted to stabilize copra prices, to serve coconut producers
by securing advantageous prices for them, to cut down to a
minimum, if not altogether eliminate, the margin of
middlemen, mostly aliens.4
General manager and board chairman was Maximo M. Kalaw;
defendants Juan Bocar and Casimiro Garcia were members of
the Board; defendant Leonor Moll became director only on
December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on
copra trading activities. Amongst the scores of contracts
executed by general manager Kalaw are the disputed
contracts, for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long
tons, $167.00: per ton, f. o. b., delivery: August and
September, 1947. This contract was later assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long
tons $145.00 per long ton, f.o.b., Philippine ports, to be
shipped: September-October, 1947. This contract was also
assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons,
$137.50 per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long
tons, $160.00 per ton, c.i.f., Los Angeles, California, delivery:
November, 1947.
(e) September 9, 1947: Franklin Baker Division of General
Foods Corporation, for 1,500 long tons, $164,00 per ton, c.i.f.,
New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd.,
for 3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports,
delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons,
$175.00 per ton, delivery: November and December, 1947.
This contract was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00
per short ton, c.i.f., Pacific ports, delivery: December, 1947
and January, 1948. This contract was assigned to Pacific
Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00
per short ton, c.i.f., Pacific ports, delivery: January, 1948. This
contract was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from
fulfilling these contracts. Nature supervened. Four devastating
typhoons visited the Philippines: the first in October, the
second and third in November, and the fourth in December,

1947. Coconut trees throughout the country suffered

extensive damage. Copra production decreased. Prices
spiralled. Warehouses were destroyed. Cash requirements
doubled. Deprivation of export facilities increased the time
necessary to accumulate shiploads of copra. Quick turnovers
became impossible, financing a problem.
When it became clear that the contracts would be
unprofitable, Kalaw submitted them to the board for approval.
It was not until December 22, 1947 when the membership
was completed. Defendant Moll took her oath on that date. A
meeting was then held. Kalaw made a full disclosure of the
situation, apprised the board of the impending heavy losses.
No action was taken on the contracts. Neither did the board
vote thereon at the meeting of January 7, 1948 following.
Then, on January 11, 1948, President Roxas made a statement
that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks
that confronted private companies, that NACOCO was
recouping its losses, and that Kalaw was to remain in his post.
Not long thereafter, that is, on January 30, 1948, the board
met again with Kalaw, Bocar, Garcia and Moll in attendance.
They unanimously approved the contracts hereinbefore
enumerated.
As was to be expected, NACOCO but partially performed the
contracts, as follows:
Buyers Tons Delivered
Undelivered
Pacific Vegetable Oil
2,386.454,613.55
Spencer Kellog
None
1,000
Franklin Baker
1,000
500
Louis Dreyfus
800
2,200
Louis Dreyfus (Adamson contract of July 30, 1947)
1,150
850
Louis Dreyfus (Adamson Contract of August 14, 1947)
1,755
245
TOTALS
7,091.45
9,408.55
The buyers threatened damage suits. Some of the claims were
settled, viz: Pacific Vegetable Oil Co., in copra delivered by
NACOCO, P539,000.00; Franklin Baker Corporation,
P78,210.00; Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact
sue before the Court of First Instance of Manila, upon claims
as follows: For the undelivered copra under the July 30
contract (Civil Case 4459); P287,028.00; for the balance on
the August 14 contract (Civil Case 4398), P75,098.63; for that
per the September 12 contract reduced to judgment (Civil
Case 4322, appealed to this Court in L-2829), P447,908.40.
These cases culminated in an out-of-court amicable
settlement when the Kalaw management was already out. The
corporation thereunder paid Dreyfus P567,024.52
representing 70% of the total claims. With particular reference
to the Dreyfus claims, NACOCO put up the defenses that: (1)
the contracts were void because Louis Dreyfus & Co.
(Overseas) Ltd. did not have license to do business here; and
(2) failure to deliver was due to force majeure, the typhoons.
To project the utter unreasonableness of this compromise, we
reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant
[Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco
for non-delivery of copra also involving a claim of P345,654.68
wherein defendant set up same defenses as above, plaintiff
accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.)
Following the same proportion, the claim of Dreyfus against
NACOCO should have been compromised for only P10,000.00,
if at all. Now, why should defendants be held liable for the
large sum paid as compromise by the Board of Liquidators?
This is just a sample to show how unjust it would be to hold
defendants liable for the readiness with which the Board of
Liquidators disposed of the NACOCO funds, although there
was much possibility of successfully resisting the claims, or at
least settlement for nominal sums like what happened in the
Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to
recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors
Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw
with negligence under Article 1902 of the old Civil Code (now
Article 2176, new Civil Code); and defendant board members,
including Kalaw, with bad faith and/or breach of trust for
having approved the contracts. The fifth amended complaint,
on which this case was tried, was filed on July 2, 1959.
Defendants resisted the action upon defenses hereinafter in
this opinion to be discussed.

The lower court came out with a judgment dismissing the

complaint without costs as well as defendants' counterclaims,
except that plaintiff was ordered to pay the heirs of Maximo
Kalaw the sum of P2,601.94 for unpaid salaries and cash
deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's
counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before,
but adversely decided by, the court below, arrest our
attention. On appeal, defendants renew their bid. And this,
upon established jurisprudence that an appellate court may
base its decision of affirmance of the judgment below on a
point or points ignored by the trial court or in which said court
was in error.6
1. First of the threshold questions is that advanced by
defendants that plaintiff Board of Liquidators has lost its legal
personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a
corporation may wind up its affairs: (1) under Section 3, Rule
104, of the Rules of Court [which superseded Section 66 of the
Corporation Law]7 whereby, upon voluntary dissolution of a
corporation, the court may direct "such disposition of its
assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation;" (2)
under Section 77 of the Corporation Law, whereby a
corporation whose corporate existence is terminated, "shall
nevertheless be continued as a body corporate for three years
after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its capital
stock, but not for the purpose of continuing the business for
which it was established;" and (3) under Section 78 of the
Corporation Law, by virtue of which the corporation, within the
three year period just mentioned, "is authorized and
empowered to convey all of its property to trustees for the
benefit of members, stockholders, creditors, and others
interested."8
It is defendants' pose that their case comes within the
coverage of the second method. They reason out that suit was
commenced in February, 1949; that by Executive Order 372,
dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the
Board of Liquidators was entrusted with the function of
settling and closing its affairs; and that, since the three year
period has elapsed, the Board of Liquidators may not now
continue with, and prosecute, the present case to its
conclusion, because Executive Order 372 provides in Section 1
thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the
National Coconut Corporation, the National Tobacco
Corporation, the National Food Producer Corporation and the
former enemy-owned or controlled corporations or
associations, . . . are hereby abolished. The said corporations
shall be liquidated in accordance with law, the provisions of
this Order, and/or in such manner as the President of the
Philippines may direct; Provided, however, That each of the
said corporations shall nevertheless be continued as a body
corporate for a period of three (3) years from the effective
date of this Executive Order for the purpose of prosecuting
and defending suits by or against it and of enabling the Board
of Liquidators gradually to settle and close its affairs, to
dispose of and, convey its property in the manner hereinafter
provided.
Citing Mr. Justice Fisher, defendants proceed to argue that
even where it may be found impossible within the 3 year
period to reduce disputed claims to judgment, nonetheless,
"suits by or against a corporation abate when it ceases to be
an entity capable of suing or being sued" (Fisher, The
Philippine Law of Stock Corporations, pp. 390-391). Corpus
Juris Secundum likewise is authority for the statement that
"[t]he dissolution of a corporation ends its existence so that
there must be statutory authority for prolongation of its life
even for purposes of pending litigation"9 and that suit "cannot
be continued or revived; nor can a valid judgment be
rendered therein, and a judgment, if rendered, is not only
erroneous, but void and subject to collateral attack." 10 So it
is, that abatement of pending actions follows as a matter of
course upon the expiration of the legal period for liquidation,
11 unless the statute merely requires a commencement of
suit within the added time. 12 For, the court cannot extend
the time alloted by statute. 13

We, however, express the view that the executive order

abolishing NACOCO and creating the Board of Liquidators
should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of
NACOCO was continued for a period of three years from the
effectivity of the order for "the purpose of prosecuting and
defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose
of and convey its property in the manner hereinafter
provided", is to be read not as an isolated provision but in
conjunction with the whole. So reading, it will be readily
observed that no time limit has been tacked to the existence
of the Board of Liquidators and its function of closing the
affairs of the various government owned corporations,
including NACOCO.
By Section 2 of the executive order, while the boards of
directors of the various corporations were abolished, their
powers and functions and duties under existing laws were to
be assumed and exercised by the Board of Liquidators. The
President thought it best to do away with the boards of
directors of the defunct corporations; at the same time,
however, the President had chosen to see to it that the Board
of Liquidators step into the vacuum. And nowhere in the
executive order was there any mention of the lifespan of the
Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusion. Thus, liquidation by
the Board of Liquidators may, under section 1, proceed in
accordance with law, the provisions of the executive order,
"and/or in such manner as the President of the Philippines
may direct." By Section 4, when any property, fund, or project
is transferred to any governmental instrumentality "for
administration or continuance of any project," the necessary
funds therefor shall be taken from the corresponding special
fund created in Section 5. Section 5, in turn, talks of special
funds established from the "net proceeds of the liquidation" of
the various corporations abolished. And by Section, 7, fifty per
centum of the fees collected from the copra standardization
and inspection service shall accrue "to the special fund
created in section 5 hereof for the rehabilitation and
development of the coconut industry." Implicit in all these, is
that the term of life of the Board of Liquidators is without time
limit. Contemporary history gives us the fact that the Board of
Liquidators still exists as an office with officials and numerous
employees continuing the job of liquidation and prosecution of
several court actions.
Not that our views on the power of the Board of Liquidators to
proceed to the final determination of the present case is
without jurisprudential support. The first judicial test before
this Court is National Abaca and Other Fibers Corporation vs.
Pore, L-16779, August 16, 1961. In that case, the corporation,
already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of
money advanced to defendant for the purchase of hemp in
behalf of the corporation. She failed to account for that
money. Defendant moved to dismiss, questioned the
corporation's capacity to sue. The lower court ordered plaintiff
to include as co-party plaintiff, The Board of Liquidators, to
which the corporation's liquidation was entrusted by Executive
Order 372. Plaintiff failed to effect inclusion. The lower court
dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the
amended complaint, as directed, and instructed the board's
incoming and outgoing correspondence clerk, Mrs. Receda
Vda. de Ocampo, to mail the original thereof to the court and
a copy of the same to defendant's counsel. She mailed the
copy to the latter but failed to send the original to the court.
This motion was rejected below. Plaintiff came to this Court on
appeal. We there said that "the rule appears to be well settled
that, in the absence of statutory provision to the contrary,
pending actions by or against a corporation are abated upon
expiration of the period allowed by law for the liquidation of
its affairs." We there said that "[o]ur Corporation Law contains
no provision authorizing a corporation, after three (3) years
from the expiration of its lifetime, to continue in its corporate
name actions instituted by it within said period of three (3)
years." 14 However, these precepts notwithstanding, we, in
effect, held in that case that the Board of Liquidators escapes
from the operation thereof for the reason that "[o]bviously,
the complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement
of its affairs is what impelled the President to create a Board
of Liquidators, to continue the management of such matters
as may then be pending." 15 We accordingly directed the
record of said case to be returned to the lower court, with
instructions to admit plaintiff's amended complaint to include,
as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another
direction.

By Executive Order 372, the government, the sole

stockholder, abolished NACOCO, and placed its assets in the
hands of the Board of Liquidators. The Board of Liquidators
thus became the trustee on behalf of the government. It was
an express trust. The legal interest became vested in the
trustee the Board of Liquidators. The beneficial interest
remained with the sole stockholder the government. At no
time had the government withdrawn the property, or the
authority to continue the present suit, from the Board of
Liquidators. If for this reason alone, we cannot stay the hand
of the Board of Liquidators from prosecuting this case to its
final conclusion. 16 The provisions of Section 78 of the
Corporation Law the third method of winding up corporate
affairs find application.
We, accordingly, rule that the Board of Liquidators has
personality to proceed as: party-plaintiff in this case.
2. Defendants' second poser is that the action is
unenforceable against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17
which was overruled, and in their nineteenth special defense,
that plaintiff's action is personal to the deceased Maximo M.
Kalaw, and may not be deemed to have survived after his
death.18 They say that the controlling statute is Section 5,
Rule 87, of the 1940 Rules of Court.19 which provides that
"[a]ll claims for money against the decedent, arising from
contract, express or implied", must be filed in the estate
proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of
Kalaw for having entered into the questioned contracts
without prior approval of the board of directors, to the
damage and prejudice of plaintiff; and is against Kalaw and
the other directors for having subsequently approved the said
contracts in bad faith and/or breach of trust." Clearly then, the
present case is not a mere action for the recovery of money
nor a claim for money arising from contract. The suit involves
alleged tortious acts. And the action is embraced in suits filed
"to recover damages for an injury to person or property, real
or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs.
Llemos, L-18107, August 30, 1962. There, plaintiffs sought to
recover damages from defendant Llemos. The complaint
averred that Llemos had served plaintiff by registered mail
with a copy of a petition for a writ of possession in Civil Case
4824 of the Court of First Instance at Catbalogan, Samar, with
notice that the same would be submitted to the Samar court
on February 23, 1960 at 8:00 a.m.; that in view of the copy
and notice served, plaintiffs proceeded to the said court of
Samar from their residence in Manila accompanied by their
lawyers, only to discover that no such petition had been filed;
and that defendant Llemos maliciously failed to appear in
court, so that plaintiffs' expenditure and trouble turned out to
be in vain, causing them mental anguish and undue
embarrassment. Defendant died before he could answer the
complaint. Upon leave of court, plaintiffs amended their
complaint to include the heirs of the deceased. The heirs
moved to dismiss. The court dismissed the complaint on the
ground that the legal representative, and not the heirs, should
have been made the party defendant; and that, anyway, the
action being for recovery of money, testate or intestate
proceedings should be initiated and the claim filed therein.
This Court, thru Mr. Justice Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting the
correlated provisions of the Rules of Court, those concerning
claims that are barred if not filed in the estate settlement
proceedings (Rule 87, sec. 5) and those defining actions that
survive and may be prosecuted against the executor or
administrator (Rule 88, sec. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as in the
case at bar) survive the death of the latter. Under Rule 87,
section 5, the actions that are abated by death are: (1) claims
for funeral expenses and those for the last sickness of the
decedent; (2) judgments for money; and (3) "all claims for
money against the decedent, arising from contract express or
implied." None of these includes that of the plaintiffsappellants; for it is not enough that the claim against the
deceased party be for money, but it must arise from "contract
express or implied", and these words (also used by the Rules
in connection with attachments and derived from the common
law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182,
189-194,
"to include all purely personal obligations other than those
which have their source in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions

that survive against a decedent's executors or administrators,
and they are: (1) actions to recover real and personal property
from the estate; (2) actions to enforce a lien thereon; and (3)
actions to recover damages for an injury to person or
property. The present suit is one for damages under the last
class, it having been held that "injury to property" is not
limited to injuries to specific property, but extends to other
wrongs by which personal estate is injured or diminished
(Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395).
To maliciously cause a party to incur unnecessary expenses,
as charged in this case, is certainly injury to that party's
property (Javier vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts
comparable to those of the present. No cogent reason exists
why we should break away from the views just expressed.
And, the conclusion remains: Action against the Kalaw heirs
and, for the matter, against the Estate of Casimiro Garcia
survives.
The preliminaries out of the way, we now go to the core of the
controversy.
3. Plaintiff levelled a major attack on the lower court's holding
that Kalaw justifiedly entered into the controverted contracts
without the prior approval of the corporation's directorate.
Plaintiff leans heavily on NACOCO's corporate by-laws. Article
IV (b), Chapter III thereof, recites, as amongst the duties of
the general manager, the obligation: "(b) To perform or
execute on behalf of the Corporation upon prior approval of
the Board, all contracts necessary and essential to the proper
accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the
problem at hand, is the nature of a general manager's position
in the corporate structure. A rule that has gained acceptance
through the years is that a corporate officer "intrusted with
the general management and control of its business, has
implied authority to make any contract or do any other act
which is necessary or appropriate to the conduct of the
ordinary business of the corporation. 21 As such officer, "he
may, without any special authority from the Board of Directors
perform all acts of an ordinary nature, which by usage or
necessity are incident to his office, and may bind the
corporation by contracts in matters arising in the usual course
of business. 22
The problem, therefore, is whether the case at bar is to be
taken out of the general concept of the powers of a general
manager, given the cited provision of the NACOCO by-laws
requiring prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves
express articulation. Ordinary in this enterprise are copra
sales for future delivery. The movement of the market requires
that sales agreements be entered into, even though the goods
are not yet in the hands of the seller. Known in business
parlance as forward sales, it is concededly the practice of the
trade. A certain amount of speculation is inherent in the
undertaking. NACOCO was much more conservative than the
exporters with big capital. This short-selling was inevitable at
the time in the light of other factors such as availability of
vessels, the quantity required before being accepted for
loading, the labor needed to prepare and sack the copra for
market. To NACOCO, forward sales were a necessity. Copra
could not stay long in its hands; it would lose weight, its value
decrease. Above all, NACOCO's limited funds necessitated a
quick turnover. Copra contracts then had to be executed on
short notice at times within twenty-four hours. To be
appreciated then is the difficulty of calling a formal meeting of
the board.
Such were the environmental circumstances when Kalaw went
into copra trading.
Long before the disputed contracts came into being, Kalaw
contracted by himself alone as general manager for
forward sales of copra. For the fiscal year ending June 30,
1947, Kalaw signed some 60 such contracts for the sale of
copra to divers parties. During that period, from those copra
sales, NACOCO reaped a gross profit of P3,631,181.48. So
pleased was NACOCO's board of directors that, on December
5, 1946, in Kalaw's absence, it voted to grant him a special
bonus "in recognition of the signal achievement rendered by
him in putting the Corporation's business on a self-sufficient
basis within a few months after assuming office, despite
numerous handicaps and difficulties."
These previous contract it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts
were known all along to the board members. Nothing was said

by them. The aforesaid contracts stand to prove one thing:

Obviously, NACOCO board met the difficulties attendant to
forward sales by leaving the adoption of means to end, to the
sound discretion of NACOCO's general manager Maximo M.
Kalaw.
Liberally spread on the record are instances of contracts
executed by NACOCO's general manager and submitted to the
board after their consummation, not before. These
agreements were not Kalaw's alone. One at least was
executed by a predecessor way back in 1940, soon after
NACOCO was chartered. It was a contract of lease executed
on November 16, 1940 by the then general manager and
board chairman, Maximo Rodriguez, and A. Soriano y Cia., for
the lease of a space in Soriano Building On November 14,
1946, NACOCO, thru its general manager Kalaw, sold 3,000
tons of copra to the Food Ministry, London, thru Sebastian
Palanca. On December 22, 1947, when the controversy over
the present contract cropped up, the board voted to approve a
lease contract previously executed between Kalaw and Fidel
Isberto and Ulpiana Isberto covering a warehouse of the latter.
On the same date, the board gave its nod to a contract for
renewal of the services of Dr. Manuel L. Roxas. In fact, also on
that date, the board requested Kalaw to report for action all
copra contracts signed by him "at the meeting immediately
following the signing of the contracts." This practice was
observed in a later instance when, on January 7, 1948, the
board approved two previous contracts for the sale of 1,000
tons of copra each to a certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to
ratify the brokerage commission of 2% of Smith, Bell and Co.,
Ltd., in the sale of 4,300 long tons of copra to the French
Government. Such ratification was necessary because, as
stated by Kalaw in that same meeting, "under an existing
resolution he is authorized to give a brokerage fee of only 1%
on sales of copra made through brokers." On January 15,
1947, the brokerage fee agreements of 1-1/2% on three
export contracts, and 2% on three others, for the sale of copra
were approved by the board with a proviso authorizing the
general manager to pay a commission up to the amount of 11/2% "without further action by the Board." On February 5,
1947, the brokerage fee of 2% of J. Cojuangco & Co. on the
sale of 2,000 tons of copra was favorably acted upon by the
board. On March 19, 1947, a 2% brokerage commission was
similarly approved by the board for Pacific Trading Corporation
on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage
fee agreements were passed upon by the board, not the sales
contracts themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling
fixed by the board.
Knowledge by the board is also discernible from other
recorded instances.1wph1.t
When the board met on May 10, 1947, the directors discussed
the copra situation: There was a slow downward trend but
belief was entertained that the nadir might have already been
reached and an improvement in prices was expected. In view
thereof, Kalaw informed the board that "he intends to wait
until he has signed contracts to sell before starting to buy
copra."23
In the board meeting of July 29, 1947, Kalaw reported on the
copra price conditions then current: The copra market
appeared to have become fairly steady; it was not expected
that copra prices would again rise very high as in the
unprecedented boom during January-April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical
rise or decrease was not indicated by the trends. Kalaw
continued to say that "the Corporation has been closing
contracts for the sale of copra generally with a margin of
P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that
same board meeting of July 29, 1947:
521. In connection with the buying and selling of copra the
Board inquired whether it is the practice of the management
to close contracts of sale first before buying. The General
Manager replied that this practice is generally followed but
that it is not always possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra
requires that it should not cease buying even when it does not
have actual contracts of sale since the suspension of buying
by the Nacoco will result in middlemen taking advantage of
the temporary inactivity of the Corporation to lower the prices
to the detriment of the producers.

(2) The movement of the market is such that it may not be

practical always to wait for the consummation of contracts of
sale before beginning to buy copra.
The General Manager explained that in this connection a
certain amount of speculation is unavoidable. However, he
said that the Nacoco is much more conservative than the
other big exporters in this respect.25
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice,
custom, and policy, the general manager may bind the
company without formal authorization of the board of
directors. 26 In varying language, existence of such authority
is established, by proof of the course of business, the usage
and practices of the company and by the knowledge which
the board of directors has, or must be presumed to have, of
acts and doings of its subordinates in and about the affairs of
the corporation. 27 So also,
x x x authority to act for and bind a corporation may be
presumed from acts of recognition in other instances where
the power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official capacity
to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has
been permitted by the directors to manage its business.29
In the case at bar, the practice of the corporation has been to
allow its general manager to negotiate and execute contracts
in its copra trading activities for and in NACOCO's behalf
without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on
all corporate contracts. But that board itself, by its acts and
through acquiescence, practically laid aside the by-law
requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
4. But if more were required, we need but turn to the board's
ratification of the contracts in dispute on January 30, 1948,
though it is our (and the lower court's) belief that ratification
here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that
"ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of
the act or contract ratified, and is equivalent to original
authority;" and that " [t]he corporation and the other party to
the transaction are in precisely the same position as if the act
or contract had been authorized at the time." 30 The
language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more or
less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a
corporation to contract, and any ratification or adoption is
equivalent to a grant of prior authority." 31
Indeed, our law pronounces that "[r]atification cleanses the
contract from all its defects from the moment it was
constituted." 32 By corporate confirmation, the contracts
executed by Kalaw are thus purged of whatever vice or defect
they may have. 33
In sum, a case is here presented whereunder, even in the face
of an express by-law requirement of prior approval, the law on
corporations is not to be held so rigid and inflexible as to fail
to recognize equitable considerations. And, the conclusion
inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the
record in terms of "bad faith and/or breach of trust" in the
board's ratification of the contracts without prior approval of
the board. For, in reality, all that we have on the government's
side of the scale is that the board knew that the contracts so
confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute
the contracts without need of prior approval. Everybody,
including Kalaw himself, thought so, and for a long time.
Doubts were first thrown on the way only when the contracts
turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply
connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud.34
Applying this precept to the given facts herein, we find that

there was no "dishonest purpose," or "some moral obliquity,"

or "conscious doing of wrong," or "breach of a known duty," or
"Some motive or interest or ill will" that "partakes of the
nature of fraud."

As the trial court correctly observed, this is a case of damnum

absque injuria. Conjunction of damage and wrong is here
absent. There cannot be an actionable wrong if either one or
the other is wanting. 43

Nor was it even intimated here that the NACOCO directors

acted for personal reasons, or to serve their own private
interests, or to pocket money at the expense of the
corporation. 35 We have had occasion to affirm that bad faith
contemplates a "state of mind affirmatively operating with
furtive design or with some motive of self-interest or ill will or
for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132,
148-149, 35 L. ed. 662, 669, quotes with approval from Judge
Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon
a close examination of all the reported cases, although there
are many dicta not easily reconcilable, yet I have found no
judgment or decree which has held directors to account,
except when they have themselves been personally guilty of
some fraud on the corporation, or have known and connived
at some fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties. . .
." Plaintiff did not even dare charge its defendant-directors
with any of these malevolent acts.

7. On top of all these, is that no assertion is made and no

proof is presented which would link Kalaw's acts ratified by
the board to a matrix for defraudation of the government.
Kalaw is clear of the stigma of bad faith. Plaintiff's corporate
counsel 44 concedes that Kalaw all along thought that he had
authority to enter into the contracts, that he did so in the best
interests of the corporation; that he entered into the contracts
in pursuance of an overall policy to stabilize prices, to free the
producers from the clutches of the middlemen. The prices for
which NACOCO contracted in the disputed agreements, were
at a level calculated to produce profits and higher than those
prevailing in the local market. Plaintiff's witness, Barretto,
categorically stated that "it would be foolish to think that one
would sign (a) contract when you are going to lose money"
and that no contract was executed "at a price unsafe for the
Nacoco." 45 Really, on the basis of prices then prevailing,
NACOCO envisioned a profit of around P752,440.00. 46

Obviously, the board thought that to jettison Kalaw's contracts

would contravene basic dictates of fairness. They did not think
of raising their voice in protest against past contracts which
brought in enormous profits to the corporation. By the same
token, fair dealing disagrees with the idea that similar
contracts, when unprofitable, should not merit the same
treatment. Profit or loss resulting from business ventures is no
justification for turning one's back on contracts entered into.
The truth, then, of the matter is that in the words of the
trial court the ratification of the contracts was "an act of
simple justice and fairness to the general manager and the
best interest of the corporation whose prestige would have
been seriously impaired by a rejection by the board of those
contracts which proved disadvantageous." 37
The directors are not liable." 38
6. To what then may we trace the damage suffered by
NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then
on our copra-producing regions. Result: Copra production was
impaired, prices spiralled, warehouses destroyed. Quick
turnovers could not be expected. NACOCO was not alone in
this misfortune. The record discloses that private traders, old,
experienced, with bigger facilities, were not spared; also
suffered tremendous losses. Roughly estimated, eleven
principal trading concerns did run losses to about
P10,300,000.00. Plaintiff's witness Sisenando Barretto, head
of the copra marketing department of NACOCO, observed that
from late 1947 to early 1948 "there were many who lost
money in the trade." 39 NACOCO was not immune from such
usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO
resisted the suits filed by Louis Dreyfus & Co. by pleading in
its answers force majeure as an affirmative defense and there
vehemently asserted that "as a result of the said typhoons,
extensive damage was caused to the coconut trees in the
copra producing regions of the Philippines and according to
estimates of competent authorities, it will take about one year
until the coconut producing regions will be able to produce
their normal coconut yield and it will take some time until the
price of copra will reach normal levels;" and that "it had never
been the intention of the contracting parties in entering into
the contract in question that, in the event of a sharp rise in
the price of copra in the Philippine market produce by force
majeure or by caused beyond defendant's control, the
defendant should buy the copra contracted for at exorbitant
prices far beyond the buying price of the plaintiff under the
contract." 40
A high regard for formal judicial admissions made in court
pleadings would suffice to deter us from permitting plaintiff to
stray away therefrom, to charge now that the damage
suffered was because of Kalaw's negligence, or for that
matter, by reason of the board's ratification of the contracts.
41
Indeed, were it not for the typhoons, 42 NACOCO could have,
with ease, met its contractual obligations. Stock accessibility
was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra
a day. The various contracts involved delivery of but 16,500
tons over a five-month period. Despite the typhoons, NACOCO
was still able to deliver a little short of 50% of the tonnage
required under the contracts.

Kalaw's acts were not the result of haphazard decisions either.

Kalaw invariably consulted with NACOCO's Chief Buyer,
Sisenando Barretto, or the Assistant General Manager. The
dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He
could not be expected to predict the coming of unpredictable
typhoons. And even as typhoons supervened Kalaw was not
remissed in his duty. He exerted efforts to stave off losses. He
asked the Philippine National Bank to implement its
commitment to extend a P400,000.00 loan. The bank did not
release the loan, not even the sum of P200,000.00, which, in
October, 1947, was approved by the bank's board of directors.
In frustration, on December 12, 1947, Kalaw turned to the
President, complained about the bank's short-sighted policy. In
the end, nothing came out of the negotiations with the bank.
NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as
much as simple negligence, would seem to be supported by
the fact that even as the contracts were being questioned in
Congress and in the NACOCO board itself, President Roxas
defended the actuations of Kalaw. On December 27, 1947,
President Roxas expressed his desire "that the Board of
Directors should reelect Hon. Maximo M. Kalaw as General
Manager of the National Coconut Corporation." 47 And, on
January 7, 1948, at a time when the contracts had already
been openly disputed, the board, at its regular meeting,
appointed Maximo M. Kalaw as acting general manager of the
corporation.
Well may we profit from the following passage from
Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092, May
18, 1962:
"They (the directors) hold such office charged with the duty to
act for the corporation according to their best judgment, and
in so doing they cannot be controlled in the reasonable
exercise and performance of such duty. Whether the business
of a corporation should be operated at a loss during a
business depression, or closed down at a smaller loss, is a
purely business and economic problem to be determined by
the directors of the corporation, and not by the court. It is a
well known rule of law that questions of policy of management
are left solely to the honest decision of officers and directors
of a corporation, and the court is without authority to
substitute its judgment for the judgment of the board of
directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are
not reviewable by the courts." (Fletcher on Corporations, Vol.
2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the
case for defendants. 49
Viewed in the light of the entire record, the judgment under
review must be, as it is hereby, affirmed.
Without costs. So ordered.
Reyes, J.B.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M.
SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO
ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for
respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San
Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction,
with prayer for issuance of writ of preliminary injunction,
arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent
San Miguel Corporation, filed with the Securities and
Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing
of amended by- laws, injunction and damages with prayer for
a preliminary injunction" against the majority of the members
of the Board of Directors and San Miguel Corporation as an
unwilling petitioner. The petition, entitled "John Gokongwei Jr.
vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio
Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as
SEC Case No. 1375.
As a first cause of action, petitioner alleged that on
September 18, 1976, individual respondents amended by
bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961,
when the outstanding capital stock of respondent corporation
was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at
P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a
total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII
of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the
Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up
capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the
stockholders.
As a second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the
membership of the Board of Directors had changed since the
authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the
questioned amendment, petitioner had all the qualifications to
be a director of respondent corporation, being a Substantial
stockholder thereof; that as a stockholder, petitioner had
acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely provided
for petitioner's disqualification and deprived him of his vested
right as afore-mentioned hence the amended by-laws are null
and void. 1

As additional causes of action, it was alleged that corporations

have no inherent power to disqualify a stockholder from being
elected as a director and, therefore, the questioned act is
ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with
respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative
of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship,
is unreasonable and oppressive and, therefore, void; and that
the portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in
writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be
declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case,
petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent
corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain
documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from
its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the
documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A.
Soriano Corporation (ANSCOR); (c) latest balance sheet of San
Miguel International, Inc.; (d) authority of the stockholders to
invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances,
bonuses, and other compensation, if any, received by Andres
M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of
Documents" was opposed by respondents, alleging, among
others that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since
the materiality or relevance of the evidence sought cannot be
determined until the issues are joined, that it fails to show
good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of
the corporation and, therefore, privileged.
During the pendency of the motion for production,
respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition,
denying the substantial allegations therein and stating, by
way of affirmative defenses that "the action taken by the
Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board
on March 13, 1961 and long prior thereto has never been
revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the
total subscribed capital stock at the time the delegation of
said power is made, not when the Board opts to exercise said
delegated power"; that petitioner has not availed of his intracorporate remedy for the nullification of the amendment,
which is to secure its repeal by vote of the stockholders
representing a majority of the subscribed capital stock at any
regular or special meeting, as provided in Article VIII, section I
of the by-laws and section 22 of the Corporation law, hence
the, petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other
amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its
by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent
with any existing law; that respondent corporation should not
be precluded from adopting protective measures to minimize
or eliminate situations where its directors might be tempted
to put their personal interests over t I hat of the corporation;
that the questioned amended by-laws is a matter of internal
policy and the judgment of the board should not be interfered
with: That the by-laws, as amended, are valid and binding and
are intended to prevent the possibility of violation of criminal
and civil laws prohibiting combinations in restraint of trade;
and that the petition states no cause of action. It was,

therefore, prayed that the petition be dismissed and that

petitioner be ordered to pay damages and attorney's fees to
respondents. The application for writ of preliminary injunction
was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed
their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total
holding amounted to 622,987 shares: that in October 1972,
the Consolidated Foods Corporation (CFC) likewise began
acquiring shares in respondent (corporation. until its total
holdings amounted to P543,959.00 in September 1976; that
on January 12, 1976, petitioner, who is president and
controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and
Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the
stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting
of March 18, 1976, petitioner was rejected by the stockholders
in his bid to secure a seat in the Board of Directors on the
basic issue that petitioner was engaged in a competitive
business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board
of Directors at the next annual meeting; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages,
exemplary damages, expenses of litigation and attorney's
fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of
the motion for production and inspection of documents was
filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr.
and Eduardo R. Visaya were allowed to intervene as
oppositors and they accordingly filed their oppositionsintervention to the petition.
On December 29, 1976, the Securities and Exchange
Commission resolved the motion for production and inspection
of documents by issuing Order No. 26, Series of 1977, stating,
in part as follows:
Considering the evidence submitted before the Commission
by the petitioner and respondents in the above-entitled case,
it is hereby ordered:
1.
That respondents produce and permit the inspection,
copying and photographing, by or on behalf of the petitionermovant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues
involved in the main case. Accordingly, the respondents
should allow petitioner-movant entry in the principal office of
the respondent Corporation, San Miguel Corporation on
January 14, 1977, at 9:30 o'clock in the morning for purposes
of enforcing the rights herein granted; it being understood
that the inspection, copying and photographing of the said
documents shall be undertaken under the direct and strict
supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not
covered by this Order and any inspection thereof shall require
the prior permission of this Commission;
2.
As to the Balance Sheet of San Miguel International,
Inc. as well as the list of salaries, allowances, bonuses,
compensation and/or remuneration received by respondent
Jose M. Soriano, Jr. and Andres Soriano from San Miguel
International, Inc. and/or its successors-in- interest, the
Petition to produce and inspect the same is hereby DENIED, as
petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to
inspect said documents;
3.
In view of the Manifestation of petitioner-movant
dated November 29, 1976, withdrawing his request to copy
and inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal and
amendments thereof for the reason that he had already
obtained the same, the Commission takes note thereof; and

4.
Finally, the Commission holds in abeyance the
resolution on the matter of production and inspection of the
authority of the stockholders of San Miguel Corporation to
invest the funds of respondent corporation in San Miguel
International, Inc., until after the hearing on the merits of the
principal issues in the above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet
to be heard, respondent corporation issued a notice of special
stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such
meeting for February 10, 1977. This prompted petitioner to
ask respondent Commission for a summary judgment insofar
as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders' meeting for the
aforesaid purpose, private respondents admitted the invalidity
of the amendments of September 18, 1976. The motion for
summary judgment was opposed by private respondents.
Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order",
praying that pending the determination of petitioner's
application for the issuance of a preliminary injunction and/or
petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from
holding the special stockholder's meeting as scheduled. This
motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an
order denying the motion for issuance of temporary
restraining order. After receipt of the order of denial,
respondents conducted the special stockholders' meeting
wherein the amendments to the by-laws were ratified. On
February 14, 1977, petitioner filed a consolidated motion for
contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's
motion for summary judgment was filed by petitioner before
respondent Commission on March 10, 1977. Petitioner alleges
that up to the time of the filing of the instant petition, the said
motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and
denying in part petitioner's motion for production of record
had not yet been resolved.
In view of the fact that the annul stockholders' meeting of
respondent corporation had been scheduled for May 10, 1977,
petitioner filed with respondent Commission a Manifestation
stating that he intended to run for the position of director of
respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a
Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate
for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case
No. 1375. By reason thereof, petitioner filed a manifestation
and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents
were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's
irreparable damage and prejudice, Allegedly despite a
subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the
stockholders' meeting.
Petitioner alleges that there appears a deliberate and
concerted inability on the part of the SEC to act hence
petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that
respondent corporation has been investing corporate funds in
other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17
1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty
of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to
declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the

fact that said motions were filed as early as February 4, 1977,

the commission acted thereon only on April 25, 1977, when it
denied respondents' motion to dismiss and gave them two (2)
days within which to file their answer, and set the case for
hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders'
meeting, including in the Agenda thereof, the following:
6.
Re-affirmation of the authorization to the Board of
Directors by the stockholders at the meeting on March 20,
1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for
which the Corporation has been organized, and ratification of
the investments thereafter made pursuant thereto.

violation of his rights as a stockholder, warranting immediate

judicial intervention.
It is prayed in the supplemental petition that the SEC orders
complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International.
Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and
Jose M. Soriano filed their comment, alleging that the petition
is without merit for the following reasons:

By reason of the foregoing, on April 28, 1977, petitioner filed

with the SEC an urgent motion for the issuance of a writ of
preliminary injunction to restrain private respondents from
taking up Item 6 of the Agenda at the annual stockholders'
meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on
the merits. Respondent Commission, however, cancelled the
dates of hearing originally scheduled and reset the same to
May 16 and 17, 1977, or after the scheduled annual
stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on
May 3, 1977, but this notwithstanding, no action has been
taken up to the date of the filing of the instant petition.

(1)
that the petitioner the interest he represents are
engaged in business competitive and antagonistic to that of
respondent San Miguel Corporation, it appearing that the
owns and controls a greater portion of his SMC stock thru the
Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in business
directly and substantially competing with the allied businesses
of respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had
accumulated investments. Further, when CFC and Robina had
accumulated shares in SMC, the Board of Directors of SMC
realized the clear and present danger that competitors or
antagonistic parties may be elected directors and thereby
have easy and direct access to SMC's business and trade
secrets and plans;

With respect to the afore-mentioned SEC cases, it is

petitioner's contention before this Court that respondent
Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking
to prevent illegal and/or arbitrary impositions or limitations
upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in
gross derogation of petitioner's rights to property and due
process. He prayed that this Court direct respondent SEC to
act on collateral incidents pending before it.

(2)
that the amended by law were adopted to preserve
and protect respondent SMC from the clear and present
danger that business competitors, if allowed to become
directors, will illegally and unfairly utilize their direct access to
its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of
no less that the Constitution and pertinent laws against
combinations in restraint of trade;

On May 6, 1977, this Court issued a temporary restraining

order restraining private respondents from disqualifying or
preventing petitioner from running or from being voted as
director of respondent corporation and from submitting for
ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making
effective the amended by-laws of respondent corporation,
until further orders from this Court or until the Securities and
Ex-change Commission acts on the matters complained of in
the instant petition.

(3)
that by laws are valid and binding since a corporation
has the inherent right and duty to preserve and protect itself
by excluding competitors and antogonistic parties, under the
law of self-preservation, and it should be allowed a wide
latitude in the selection of means to preserve itself;

On May 14, 1977, petitioner filed a Supplemental Petition,

alleging that after a restraining order had been issued by this
Court, or on May 9, 1977, the respondent Commission served
upon petitioner copies of the following orders:
(1)
Order No. 449, Series of 1977 (SEC Case No. 1375);
denying petitioner's motion for reconsideration, with its
supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's
motion for reconsideration of the order denying the issuance
of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the
stockholders' meeting;
(2)
Order No. 450, Series of 1977 (SEC Case No. 1375),
allowing petitioner to run as a director of respondent
corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the
validity of the bylaws in dispute, and denying deferment of
Item 6 of the Agenda for the annual stockholders' meeting;
and
(3)
Order No. 451, Series of 1977 (SEC Case No. 1375),
denying petitioner's motion for reconsideration of the order of
respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1)
that respondent Commission acted with indecent haste and
without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it
and still pending before one of its Commissioners, and without
hearing petitioner thereon despite petitioner's request to have
the same calendared for hearing , and (3) that the
respondents acted oppressively against the petitioner in

(4)
that the delay in the resolution and disposition of SEC
Cases Nos. 1375 and 1423 was due to petitioner's own acts or
omissions, since he failed to have the petition to suspend,
pendente lite the amended by-laws calendared for hearing. It
was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with
deliberate dispatch", and
(5)
that, even assuming that the petition was
meritorious was, it has become moot and academic because
respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be
dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed
his comment, alleging that the petition has become moot and
academic for the reason, among others that the acts of
private respondent sought to be enjoined have reference to
the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in
said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as
director; and that in the same meeting, Item 6 of the Agenda
was discussed, voted upon, ratified and confirmed. Further it
was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the
merits has been had; hence the elevation of these issues
before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that
the petition presents justiciable questions for the
determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the
case moot; that the amendment to the bylaws which

specifically bars petitioner from being a director is void since

it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a
separate comment, alleging that after receiving a copy of the
restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it
states that Order No. 450 which denied deferment of Item 6 of
the Agenda of the annual stockholders' meeting of respondent
corporation, took into consideration an urgent manifestation
filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged
that the main petition has, therefore, become moot and
academic.
On September 29,1977, petitioner filed a second
supplemental petition with prayer for preliminary injunction,
alleging that the actuations of respondent SEC tended to
deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has
the authority and the competence to act on them as it may
see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues
for resolution;
(1)
whether or not the provisions of the amended bylaws of respondent corporation, disqualifying a competitor
from nomination or election to the Board of Directors are valid
and reasonable;
(2) whether or not respondent SEC gravely abused its
discretion in denying petitioner's request for an examination
of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3)
whether or not respondent SEC committed grave
abuse of discretion in allowing discussion of Item 6 of the
Agenda of the Annual Stockholders' Meeting on May 10, 1977,
and the ratification of the investment in a foreign corporation
of the corporate funds, allegedly in violation of section 17-1/2
of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal
question which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to
remand the case to respondent SEC for an appropriate ruling
on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal
question. There is no factual dispute as to what the provisions
are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved ... ";
second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... ";
third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice
against petitioner ... ", and "Commissioner Sulit ... approved
the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC
would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano
similarly pray that this Court resolve the legal issues raised by
the parties in keeping with the "cherished rules of procedure"
that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citing Gayong v. Gayos.
3 To the same effect is the prayer of San Miguel Corporation
that this Court resolve on the merits the validity of its
amended by laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by
the parties concerned and, more importantly, by this
Honorable Court, would have been for naught because the
main question will come back to this Honorable Court for final
resolution." Respondent Eduardo R. Visaya submits a similar
appeal.

It is only the Solicitor General who contends that the case

should be remanded to the SEC for hearing and decision of
the issues involved, invoking the latter's primary jurisdiction
to hear and decide case involving intra-corporate
controversies.
It is an accepted rule of procedure that the Supreme Court
should always strive to settle the entire controversy in a
single proceeding, leaving nor root or branch to bear the
seeds of future litigation. 4 Thus, in Francisco v. City of Davao,
5 this Court resolved to decide the case on the merits instead
of remanding it to the trial court for further proceedings since
the ends of justice would not be subserved by the remand of
the case. In Republic v. Security Credit and Acceptance
Corporation, et al., 6 this Court, finding that the main issue is
one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the
case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing
precedent where this Court, in similar situations resolved to
decide the cases on the merits, instead of remanding them to
the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public
interest demand an early disposition of the case; or (c) where
the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position,
based upon said evidence, to decide the case on its merits. 8
It is settled that the doctrine of primary jurisdiction has no
application where only a question of law is involved. 8a
Because uniformity may be secured through review by a
single Supreme Court, questions of law may appropriately be
determined in the first instance by courts. 8b In the case at
bar, there are facts which cannot be denied, viz.: that the
amended by-laws were adopted by the Board of Directors of
the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section
22 of the Corporation Law; that in a special meeting on
February 10, 1977 held specially for that purpose, the
amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing
company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual
meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the
stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a
competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in
purely a question of law. 9 Whether the by-law is in conflict
with the law of the land, or with the charter of the corporation,
or is in a legal sense unreasonable and therefore unlawful is a
question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere
matter of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have exercised
their authority. 11
Petitioner claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the
minority and prevent them from having representation in the
Board", at the same time depriving petitioner of his "vested
right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose
M. Soriano and San Miguel Corporation content that ex.
conclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to
the corporation; that it is essentially a preventive measure to
assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged
with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in
the promotion of the interest of the competitor at the expense
of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation,
which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming
public. It is further argued that there is not vested right of any
stockholder under Philippine Law to be voted as director of a

corporation. It is alleged that petitioner, as of May 6, 1978,

has exercised, personally or thru two corporations owned or
controlled by him, control over the following shareholdings in
San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares;
(c) CFC Corporation 658,313 shares, or a total of 1,403,285
shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the
total outstanding capital stock of San Miguel Corporation. It is
also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC
Corporation, both of which are allegedly controlled by
petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and
substantially competing with the alleged businesses of San
Miguel Corporation, and of corporations in which SMC has
substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of
competition are enumerated in its Board Resolution dated
April 28, 1978, thus:
Product Line
Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs
0.6%
10.0% 10.6%
Layer Pullets
33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over P400
million or more than 20% of the P2 billion total product sales
of SMC. Significantly, the combined market shares of SMC and
CFC-Robina in layer pullets dressed chicken, poultry and hog
feeds ice cream, instant coffee and woven fabrics would result
in a position of such dominance as to affect the prevailing
market factors.
It is further asserted that in 1977, the CFC-Robina group was
in direct competition on product lines which, for SMC,
represented sales amounting to more than ?478 million. In
addition, CFC-Robina was directly competing in the sale of
coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in
product sales amounting to more than P95 million. The areas
of competition between SMC and CFC-Robina in 1977
represented, therefore, for SMC, product sales of more than
P849 million.
According to private respondents, at the Annual Stockholders'
Meeting of March 18, 1976, 9,894 stockholders, in person or
by proxy, owning 23,436,754 shares in SMC, or more than
90% of the total outstanding shares of SMC, rejected
petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a
competitor gets a board seat in SMC." On September 18,
1978, the Board of Directors of SMC, by "virtue of powers
delegated to it by the stockholders," approved the
amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and
ratified by 5,716 shareholders owning 24,283,945 shares, or
more than 80% of the total outstanding shares. Only 12
shareholders, representing 7,005 shares, opposed the
confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning
27,257.014 shares, or more than 90% of the outstanding
shares, rejected petitioner's candidacy, while 946
stockholders, representing 1,648,801 shares voted for him. On
the May 9, 1978 Annual Stockholders' Meeting, 12,480
shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares. voted against
petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
OF DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by
laws were adopted by the Board of Directors of San Miguel

Corporation a-, a measure of self-defense to protect the

corporation from the clear and present danger that the
election of a business competitor to the Board may cause
upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue
whether or not respondent San Miguel Corporation could, as a
measure of self- protection, disqualify a competitor from
nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has
the inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. 12
At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled
throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has
this inherent power as one of its necessary and inseparable
legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government
being essential to enable the corporation to accomplish the
purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications,
duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in
addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation
of which he is a director ... " In Government v. El Hogar, 14 the
Court sustained the validity of a provision in the corporate bylaw requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00,
which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in
conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the
act of incorporation and lawfully enacted by-laws and not
forbidden by law." 15 To this extent, therefore, the stockholder
may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and
surrendered it to the will of the majority of his fellow
incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any
corporation may amend its articles of incorporation by a vote
or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation If
the amendment changes, diminishes or restricts the rights of
the existing shareholders then the disenting minority has only
one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the
owners of the majority of the subscribed capital stock may
amend or repeal any by-law or adopt new by-laws. It cannot
be said, therefore, that petitioner has a vested right to be
elected director, in the face of the fact that the law at the
time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be
subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide
for the qualifications of its directors, the next question that
must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a
private corporation are not regarded as trustees, there cannot
be any doubt that their character is that of a fiduciary insofar
as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders,
"they occupy a fiduciary relation, and in this sense the relation

is one of trust." 18 "The ordinary trust relationship of directors

of a corporation and stockholders", according to Ashaman v.
Miller, 19 "is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated
the standard of fiduciary obligation of the directors of
corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ...
He who is in such fiduciary position cannot serve himself first
and his cestuis second. ... He cannot manipulate the affairs of
his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention
of a corporate entity violate the ancient precept against
serving two masters ... He cannot utilize his inside information
and strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot violate
rules of fair play by doing indirectly though the corporation
what he could not do so directly. He cannot use his power for
his personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to
satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised
for the aggrandizement, preference or advantage of the
fiduciary to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was
said:
... A person cannot serve two hostile and adverse master,
without detriment to one of them. A judge cannot be impartial
if personally interested in the cause. No more can a director.
Human nature is too weak -for this. Take whatever statute
provision you please giving power to stockholders to choose
directors, and in none will you find any express prohibition
against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by
mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a
stockholder in a competing company from being a director,
the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish
and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as
selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of
control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by
law. ... . 22
These principles have been applied by this Court in previous
cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF
HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION,
HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to
Fletcher, that corporations have the power to make by-laws
declaring a person employed in the service of a rival company
to be ineligible for the corporation's Board of Directors. ... (A)n
amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation
whose business is in competition with or is antagonistic to the
other corporation is valid." 24 This is based upon the principle
that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the
other. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey,
where the Supreme Court held that the Corporation Law in
New Jersey prescribed the only qualification, and therefore the
corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has
been held that an officer of a corporation cannot engage in a

business in direct competition with that of the corporation

where he is a director by utilizing information he has received
as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing
enterprise which cripples or injures the business of the
corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not
permitted to use their position of trust and confidence to
further their private interests." 27 In a case where directors of
a corporation cancelled a contract of the corporation for
exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may
not reap the fruits of his misconduct to the exclusion of his
principal. 28
The doctrine of "corporate opportunity" 29 is precisely a
recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls
for protection. 30
It is not denied that a member of the Board of Directors of the
San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification;
(c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with
other firms.
It is obviously to prevent the creation of an opportunity for an
officer or director of San Miguel Corporation, who is also the
officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial
sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy
his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego,
supra the court sustained as valid and reasonable an
amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents,
nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee,
explained the reasons of the court, thus:
... A bank director has access to a great deal of information
concerning the business and plans of a bank which would
likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum
disqualification to include any director, officer, employee,
agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection
against rivals and others who might acquire information which
might be used against the interests of the corporation as a
legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney
for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office
discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this
opportunity for conflicting loyalties and potential misuse and
leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws
upheld by the courts, as follows:
(1)
A director shall not be directly or indirectly interested
as a stockholder in any other firm, company, or association
which competes with the subject corporation.
(2)
A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation,
(3)
A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or association
which compete with the subject corporation.

(4)
A director shall be of good moral character as an
essential qualification to holding office.
(5)
No person who is an attorney against the corporation
in a law suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human
experience that a person cannot serve two hostile masters
without detriment to one of them.
The offer and assurance of petitioner that to avoid any
possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be
discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement,
it would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his
investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted
principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of
directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is
their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies
and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors
may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary
duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are
enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits
as director.
Indeed, access by a competitor to confidential information
regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new
products could enable said competitor to utilize such
knowledge to his advantage. 32
There is another important consideration in determining
whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of
the Constitution provides: "The State shall regulate or prohibit
private monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall
be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade.
The penalty of prision correccional in its minimum period or a
fine ranging from two hundred to six thousand pesos, or both,
shall be imposed upon:
1.
Any person who shall enter into any contract or
agreement or shall take part in any conspiracy or combination
in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition
in the market.
2.
Any person who shag monopolize any merchandise
or object of trade or commerce, or shall combine with any
other person or persons to monopolize said merchandise or
object in order to alter the price thereof by spreading false
rumors or making use of any other artifice to restrain free
competition in the market.
3.
Any person who, being a manufacturer, producer, or
processor of any merchandise or object of commerce or an
importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or
object of commerce or with any other persons not so similarly

engaged for the purpose of making transactions prejudicial to

lawful commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in
or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced,
processed, or imported merchandise or object of commerce is
used.
There are other legislation in this jurisdiction, which prohibit
monopolies and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels
of competition by improving the consumers' effectiveness as
the final arbiter in free markets. These laws are designed to
preserve free and unfettered competition as the rule of trade.
"It rests on the premise that the unrestrained interaction of
competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest
quality ... ." 34 they operate to forestall concentration of
economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and
combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly
restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and
"unfair competition" appear to have a well defined meaning in
other jurisdictions. A "monopoly" embraces any combination
the tendency of which is to prevent competition in the broad
and general sense, or to control prices to the detriment of the
public. 37 In short, it is the concentration of business in the
hands of a few. The material consideration in determining its
existence is not that prices are raised and competition
actually excluded, but that power exists to raise prices or
exclude competition when desired. 38 Further, it must be
considered that the Idea of monopoly is now understood to
include a condition produced by the mere act of individuals.
Its dominant thought is the notion of exclusiveness or unity, or
the suppression of competition by the qualification of interest
or management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the
contentions of petitioner are not in accord with reality. The
election of petitioner to the Board of respondent Corporation
can bring about an illegal situation. This is because an express
agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants
conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words
they used. For instance, the Clayton Act prohibits a person
from serving at the same time as a director in any two or
more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the
elimination of competition between them would constitute
violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers
which may arise when an individual simultaneously acts as a
director of two or more competing corporations. A common
director of two or more competing corporations would have
access to confidential sales, pricing and marketing information
and would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by
Travers, thus:
The argument for prohibiting competing corporations from
sharing even one director is that the interlock permits the
coordination of policies between nominally independent firms
to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is to
be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would
injure B without violating his duty of loyalty to B at the same
time he could hardly abstain from voting without depriving A
of his best judgment. If the firms really do compete in the
sense of vying for economic advantage at the expense of the
other there can hardly be any reason for an interlock
between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of
the U. S. Congress on section 9 of the Clayton Act, it was
established that: "By means of the interlocking directorates
one man or group of men have been able to dominate and
control a great number of corporations ... to the detriment of

the small ones dependent upon them and to the injury of the
public. 44
Shared information on cost accounting may lead to price
fixing. Certainly, shared information on production, orders,
shipments, capacity and inventories may lead to control of
production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and
cost conditions of the products of San Miguel Corporation, the
essence of competition in a free market for the purpose of
serving the lowest priced goods to the consuming public
would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by
region or by brand in order to get the most out of the
consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion
and combination in restraint of trade. Reason and experience
point to the inevitable conclusion that the inherent tendency
of interlocking directorates between companies that are
related to each other as competitors is to blunt the edge of
rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate
competition. As respondent SMC aptly observes, knowledge
by CFC-Robina of SMC's costs in various industries and regions
in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and
change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product
line in which it competes with SMC. Access to SMC pricing
policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods
of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain
extent, engaged in agriculture, then the election of petitioner
to the Board of SMC may constitute a violation of the
prohibition contained in section 13(5) of the Corporation Law.
Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in
agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of
incorporations ... ."
Neither are We persuaded by the claim that the by-law was
Intended to prevent the candidacy of petitioner for election to
the Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally
upon all persons of a class. Besides, before petitioner can be
declared ineligible to run for director, there must be hearing
and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy
and management, therefore, support the view that a by-law
which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public
policy, wide latitude may be accorded to the corporation in
adopting measures to protect legitimate corporation interests.
Thus, "where the reasonableness of a by-law is a mere matter
of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have expressed
their authority. 45
Although it is asserted that the amended by-laws confer on
the present Board powers to perpetua themselves in power
such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations. One
of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies
a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree,
certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46
The test must be whether the business does in fact compete,
not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or
entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, Identity of
products and area of competition should be taken into

consideration. It is, therefore, necessary to show that

petitioner's business covers a substantial portion of the same
markets for similar products to the extent of not less than
10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended
by-laws, it does not follow as a necessary consequence that
petitioner is ipso facto disqualified. Consonant with the
requirement of due process, there must be due hearing at
which the petitioner must be given the fullest opportunity to
show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the
responsibility of directors to act with fairness to the
stockholders. 48 Pursuant to this obligation and to remove
any suspicion that this power may be utilized by the
incumbent members of the Board to perpetuate themselves in
power, any decision of the Board to disqualify a candidate for
the Board of Directors should be reviewed by the Securities
behind Exchange Commission en banc and its decision shall
be final unless reversed by this Court on certiorari. 49 Indeed,
it is a settled principle that where the action of a Board of
Directors is an abuse of discretion, or forbidden by statute, or
is against public policy, or is ultra vires, or is a fraud upon
minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court
of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion
in denying petitioner's request for an examination of the
records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its
memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the
teeth of undisputed facts that, over a specific period,
petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and
their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of
May 18, 1975; (3) a copy of the minutes of the stockholders'
meeting of March 18,1976; (4) a breakdown of SMC's P186.6
million investment in associated companies and other
companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US $100 million Euro-Dollar
Loan Agreement of SMC; and (7) copies of the minutes of all
meetings of the Board of Directors from January 1975 to May
1976, with deletions of sensitive data, which deletions were
not objected to by petitioner.
Further, it was averred that upon request, petitioner was
informed in writing on September 18, 1976; (1) that SMC's
foreign investments are handled by San Miguel International,
Inc., incorporated in Bermuda and wholly owned by SMC; this
was SMC's first venture abroad, having started in 1948 with
an initial outlay of ?500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million (3) that the
total cash dividends received by SMC from SMI since 1953 has
amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having
been used in line with a program for the setting up of
breweries by SMI
These averments are supported by the affidavit of the
Corporate Secretary, enclosing photocopies of the aforementioned documents. 51
Pursuant to the second paragraph of section 51 of the
Corporation Law, "(t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours."
The stockholder's right of inspection of the corporation's
books and records is based upon their ownership of the assets
and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership
or interest be termed an equitable ownership, a beneficial
ownership, or a ownership. 52 This right is predicated upon
the necessity of self-protection. It is generally held by majority
of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised
by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the
corporation. 53 In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has

to be proper and lawful in character and not inimical to the

interest of the corporation. 54 In Grey v. Insular Lumber, 55
this Court held that "the right to examine the books of the
corporation must be exercised in good faith, for specific and
honest purpose, and not to gratify curiosity, or for specific and
honest purpose, and not to gratify curiosity, or for speculative
or vexatious purposes. The weight of judicial opinion appears
to be, that on application for mandamus to enforce the right,
it is proper for the court to inquire into and consider the
stockholder's good faith and his purpose and motives in
seeking inspection. 56 Thus, it was held that "the right given
by statute is not absolute and may be refused when the
information is not sought in good faith or is used to the
detriment of the corporation." 57 But the "impropriety of
purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of
showing impropriety of purpose or motive. 58 It appears to be
the general rule that stockholders are entitled to full
information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the
company is being mismanaged or that it is being managed for
the personal benefit of officers or directors or certain of the
stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing.
Some state courts recognize the right under certain
conditions, while others do not. Thus, it has been held that
where a corporation owns approximately no property except
the shares of stock of subsidiary corporations which are
merely agents or instrumentalities of the holding company,
the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination,
60 and that a writ of mandamus, may be granted, as the
records of the subsidiary were, to all incontents and purposes,
the records of the parent even though subsidiary was not
named as a party. 61 mandamus was likewise held proper to
inspect both the subsidiary's and the parent corporation's
books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something
similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was
refused where the subsidiary corporation is a separate and
distinct corporation domiciled and with its books and records
in another jurisdiction, and is not legally subject to the control
of the parent company, although it owned a vast majority of
the stock of the subsidiary. 63 Likewise, inspection of the
books of an allied corporation by stockholder of the parent
company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the
class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that
the contractual right of former stockholders to inspect books
and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in
corporation's possession and control in its office in New York."

right of petitioner as stockholder to inspect the books and

records of the corporation as extending to books and records
of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion
in allowing the stockholders of respondent corporation to
ratify the investment of corporate funds in a foreign
corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI
without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the
investment to the stockholders for ratification is a sound
corporate practice and should not be thwarted but
encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for
any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders
holding shares entitling them to exercise at least two-thirds of
the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the
same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for
the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru
the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Manao
Sugar Central Co., Inc., supra, appears relevant. In said case,
one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders'
voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if
the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:

In his "Urgent Motion for Production and Inspection of

Documents" before respondent SEC, petitioner contended that
respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be
caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and
records of a corporation in order to investigate the conduct of
the management, determine the financial condition of the
corporation, and generally take an account of the stewardship
of the officers and directors. 68

"j.
Power to acquire or dispose of shares or securities.
A private corporation, in order to accomplish is purpose as
stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the
limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to
own not more than 15% of the voting stock of nay agricultural
or mining corporation; and (c) that such holdings shall be
solely for investment and not for the purpose of bringing
about a monopoly in any line of commerce of combination in
restraint of trade." The Philippine Corporation Law by Sulpicio
S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

In the case at bar, considering that the foreign subsidiary is

wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory

40.
Power to invest corporate funds. A private
corporation has the power to invest its corporate funds "in any
other corporation or business, or for any purpose other than
the main purpose for which it was organized, provide that 'its

In the Bailey case, 66 stockholders of a corporation were held

entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had Identical
officers and directors.

board of directors has been so authorized in a resolution by

the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of
the voting power on such a propose at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation.
When the investment is necessary to accomplish its purpose
or purposes as stated in its articles of incorporation the
approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized
acts of its officers or other agents. 70 This is true because the
questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is
defective from a supported failure to observe in its execution
the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding
two-thirds of the voting power. This requirement is for the
benefit of the stockholders. The stockholders for whose
benefit the requirement was enacted may, therefore, ratify
the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or
those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable
when ratified by the stockholders.
Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to
the stockholders for ratification at the annual meeting of May
10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act,
considering the common practice of corporations of
periodically submitting for the gratification of their
stockholders the acts of their directors, officers and
managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it
prays that petitioner be allowed to examine the books and
records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of
respondent San Miguel Corporation, six (6) Justices, namely,

Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and

De Castro, voted to sustain the validity per se of the amended
by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of
said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating
and acting en banc and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in
the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice
Fernando, voted to declare the issue on the validity of the
foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity
of the amended by-laws, pending hearing by this Court on the
applicability of section 13(5) of the Corporation Law to
petitioner.
Justice Fernando reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the
result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they
voted against the validity of the questioned amended bylaws
and that this question should properly be resolved first by the
SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as
director of respondent SMC in the scheduled May 6, 1979
election and subsequent elections until disqualified after
proper hearing by the respondent's Board of Directors and
petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of
this Court.
In resume, subject to the qualifications aforestated judgment
is hereby rendered GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel
International, Inc. as specified in the petition. The petition,
insofar as it assails the validity of the amended by- laws and
the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED.
No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.