SECOND DIVISION

G.R. No. 187769 June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari 1 under Rule 45 of the Revised Rules of Court is the decision 2 dated
September 24, 2008 and the resolution 3 dated April 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No.
82301. The appellate court affirmed the decision of the Regional Trial Court (RTC) of Quezon City, Branch 77,
dismissing the complaint for declaration of nullity of loan filed by petitioner Alvin Patrimonio and ordering him to
pay respondent Octavio Marasigan III (Marasigan) the sum of ₱200,000.00.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture under the
name of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-concerts and shows related
to basketball. Petitioner was already then a decorated professional basketball player while Gutierrez was a well-
known sports columnist.

In the course of their business, the petitioner pre-signed several checks to answer for the expenses of Slam Dunk.
Although signed, these checks had no payee’s name, date or amount. The blank checks were entrusted to
Gutierrez with the specific instruction not to fill them out without previous notification to and approval by the
petitioner. According to petitioner, the arrangement was made so that he could verify the validity of the payment
and make the proper arrangements to fund the account.

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan (the
petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00 on the excuse that the petitioner
needed the money for the construction of his house. In addition to the payment of the principal, Gutierrez
assured Marasigan that he would be paid an interest of 5% per month from March to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez, Marasigan
acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994. Gutierrez simultaneously
delivered to Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank, Greenhills Branch,
Check No. 21001764 with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos
Only", and the amount of "₱200,000.00". The upper right portion of the check corresponding to the date was also
filled out with the words "May 23, 1994" but the petitioner contended that the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT CLOSED." It
was later revealed that petitioner’s account with the bank had been closed since May 28, 1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the petitioner
asking for the payment of ₱200,000.00, but his demands likewise went unheeded. Consequently, he filed a
criminal case for violation of B.P. 22 against the petitioner, docketed as Criminal Case No. 42816.

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On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for Declaration of
Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He completely denied
authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement.

Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22, 1997,Gutierrez was
declared in default.

The Ruling of the RTC

The RTC ruled on February 3, 2003 in favor of Marasigan.4 It found that the petitioner, in issuing the pre-signed
blank checks, had the intention of issuing a negotiable instrument, albeit with specific instructions to Gutierrez
not to negotiate or issue the check without his approval. While under Section 14 of the Negotiable Instruments
Law Gutierrez had the prima facie authority to complete the checks by filling up the blanks therein, the RTC ruled
that he deliberately violated petitioner’s specific instructions and took advantage of the trust reposed in him by
the latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the petitioner’s
complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the
check with a right to claim reimbursement from Gutierrez.

The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a holder in due
course. He contended that when Marasigan received the check, he knew that the same was without a date, and
hence, incomplete. He also alleged that the loan was actually between Marasigan and Gutierrez with his check
being used only as a security.

The Ruling of the CA

On September 24, 2008, the CA affirmed the RTC ruling, although premised on different factual findings. After
careful analysis, the CA agreed with the petitioner that Marasigan is not a holder in due course as he did not
receive the check in good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the petitioner’s
authority. It held that the loan may not be nullified since it is grounded on an obligation arising from law and
ruled that the petitioner is still liable to pay Marasigan the sum of ₱200,000.00.

After the CA denied the subsequent motion for reconsideration that followed, the petitioner filed the present
petition for review on certiorari under Rule 45 of the Revised Rules of Court.

The Petition

The petitioner argues that: (1) there was no loan between him and Marasigan since he never authorized the
borrowing of money nor the check’s negotiation to the latter; (2) under Article 1878 of the Civil Code, a special
power of attorney is necessary for an individual to make a loan or borrow money in behalf of another; (3) the
loan transaction was between Gutierrez and Marasigan, with his check being used only as a security; (4) the check
had not been completely and strictly filled out in accordance with his authority since the condition that the
subject check can only be used provided there is prior approval from him, was not complied with; (5) even if the
check was strictly filled up as instructed by the petitioner, Marasigan is still not entitled to claim the check’s value
as he was not a holder in due course; and (6) by reason of the bad faith in the dealings between the respondents,
he is entitled to claim for damages.

The Issues

Reduced to its basics, the case presents to us the following issues:

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 1. Whether the contract of loan in the amount of ₱200,000.00 granted by respondent Marasigan to
petitioner, through respondent Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the ₱200,000.00 loan;

3. Whether respondent Gutierrez has completely filled out the subject check strictly under the authority
given by the petitioner; and

4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

We note at the outset that the issues raised in this petition are essentially factual in nature. The main point of
inquiry of whether the contract of loan may be nullified, hinges on the very existence of the contract of loan – a
question that, as presented, is essentially, one of fact. Whether the petitioner authorized the borrowing; whether
Gutierrez completely filled out the subject check strictly under the petitioner’s authority; and whether Marasigan
is a holder in due course are also questions of fact, that, as a general rule, are beyond the scope of a Rule 45
petition.

The rule that questions of fact are not the proper subject of an appeal by certiorari, as a petition for review under
Rule 45 is limited only to questions of law, is not an absolute rule that admits of no exceptions. One notable
exception is when the findings off act of both the trial court and the CA are conflicting, making their review
necessary.5 In the present case, the tribunals below arrived at two conflicting factual findings, albeit with the same
conclusion, i.e., dismissal of the complaint for nullity of the loan. Accordingly, we will examine the parties’
evidence presented.

I. Liability Under the Contract of Loan

The petitioner seeks to nullify the contract of loan on the ground that he never authorized the borrowing of
money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly requires a written authority when
the loan is contracted through an agent. The petitioner contends that absent such authority in writing, he should
not be held liable for the face value of the check because he was not a party or privy to the agreement.

Contracts of Agency May be Oral Unless The Law Requires a Specific Form

Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds himself to
render some service or to do something in representation or on behalf of another, with the consent or authority
of the latter." Agency may be express, or implied from the acts of the principal, from his silence or lack of action,
or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

As a general rule, a contract of agency may be oral. 6 However, it must be written when the law requires a specific
form, for example, in a sale of a piece of land or any interest therein through an agent.

Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an agent can
loan or borrow money in behalf of the principal, to wit:

Art. 1878. Special powers of attorney are necessary in the following cases:

xxxx

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things
which are under administration. (emphasis supplied)
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Article 1878 does not state that the authority be in writing. As long as the mandate is express, such authority may
be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al., 7 that the requirement under
Article 1878 of the Civil Code refers to the nature of the authorization and not to its form. Be that as it may, the
authority must be duly established by competent and convincing evidence other than the self serving assertion of
the party claiming that such authority was verbally given, thus:

The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special authority in Rule
138 of the Rules of Court refer to the nature of the authorization and not its form. The requirements are met if
there is a clear mandate from the principal specifically authorizing the performance of the act. As early as 1906,
this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the
one vital thing being that it shall be express. And more recently, We stated that, if the special authority is not
written, then it must be duly established by evidence:

x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And while
the same does not state that the special authority be in writing the Court has every reason to expect that, if not in
writing, the same be duly established by evidence other than the self-serving assertion of counsel himself that
such authority was verbally given him.(Home Insurance Company vs. United States lines Company, et al., 21 SCRA
863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225). (emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be Nullified for Being Void;
Petitioner is Not Bound by the Contract of Loan.

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf of the
petitioner.1âwphi1Records do not show that the petitioner executed any special power of attorney (SPA) in favor
of Gutierrez. In fact, the petitioner’s testimony confirmed that he never authorized Gutierrez (or anyone for that
matter), whether verbally or in writing, to borrow money in his behalf, nor was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in writing authorizing him to borrow
using your money?

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105)8

xxxx

Marasigan however submits that the petitioner’s acts of pre-signing the blank checks and releasing them to
Gutierrez suffice to establish that the petitioner had authorized Gutierrez to fill them out and contract the loan in
his behalf.

Marasigan’s submission fails to persuade us.

In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf of the petitioner.
As held in Yasuma v. Heirs of De Villa,9 involving a loan contracted by de Villa secured by real estate mortgages in
the name of East Cordillera Mining Corporation, in the absence of an SPA conferring authority on de Villa, there is
no basis to hold the corporation liable, to wit:

The power to borrow money is one of those cases where corporate officers as agents of the corporation need a
special power of attorney. In the case at bar, no special power of attorney conferring authority on de Villa was
ever presented. x x x There was no showing that respondent corporation ever authorized de Villa to obtain the
loans on its behalf.

xxxx

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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.

xxxx

The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after his death). (citations
omitted; emphasis supplied).

This principle was also reiterated in the case of Gozun v. Mercado,10 where this court held:

Petitioner submits that his following testimony suffices to establish that respondent had authorized Lilian to
obtain a loan from him.

xxxx

Petitioner’s testimony failed to categorically state, however, whether the loan was made on behalf of respondent
or of his wife. While petitioner claims that Lilian was authorized by respondent, the statement of account marked
as Exhibit "A" states that the amount was received by Lilian "in behalf of Mrs. Annie Mercado.

It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she was acting
for and in behalf of respondent. She thus bound herself in her personal capacity and not as an agent of
respondent or anyone for that matter.

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real property
executed by an agent, it must upon its face purport to be made, signed and sealed in the name of the principal,
otherwise, it will bind the agent only. It is not enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal. x x x (emphasis supplied).

In the absence of any showing of any agency relations or special authority to act for and in behalf of the
petitioner, the loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the petitioner is not
bound by the parties’ loan agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally sufficient
because the authority to enter into a loan can never be presumed. The contract of agency and the special
fiduciary relationship inherent in this contract must exist as a matter of fact. The person alleging it has the burden
of proof to show, not only the fact of agency, but also its nature and extent. 11 As we held in People v. Yabut:12

Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in Caloocan City
cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of the checks to the
complainant Alicia P. Andan at Caloocan City to fix the venue there. He did not take delivery of the checks as
holder, i.e., as "payee" or "indorsee." And there appears to beno contract of agency between Yambao and Andan
so as to bind the latter for the acts of the former. Alicia P. Andan declared in that sworn testimony before the
investigating fiscal that Yambao is but her "messenger" or "part-time employee." There was no special fiduciary
relationship that permeated their dealings. For a contract of agency to exist, the consent of both parties is
essential, the principal consents that the other party, the agent, shall act on his behalf, and the agent consents so
to act. It must exist as a fact. The law makes no presumption thereof. The person alleging it has the burden of
proof to show, not only the fact of its existence, but also its nature and extent. This is more imperative when it is
considered that the transaction dealt with involves checks, which are not legal tender, and the creditor may
validly refuse the same as payment of obligation.(at p. 630). (emphasis supplied)

The records show that Marasigan merely relied on the words of Gutierrez without securing a copy of the SPA in
favor of the latter and without verifying from the petitioner whether he had authorized the borrowing of money
or release of the check. He was thus bound by the risk accompanying his trust on the mere assurances of
Gutierrez.
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No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s Consent Was Not
Obtained.

Another significant point that the lower courts failed to consider is that a contract of loan, like any other contract,
is subject to the rules governing the requisites and validity of contracts in general. 13 Article 1318 of the Civil
Code14enumerates the essential requisites for a valid contract, namely:

1. consent of the contracting parties;

2. object certain which is the subject matter of the contract; and

3. cause of the obligation which is established.

In this case, the petitioner denied liability on the ground that the contract lacked the essential element of consent.
We agree with the petitioner. As we explained above, Gutierrez did not have the petitioner’s written/verbal
authority to enter into a contract of loan. While there may be a meeting of the minds between Gutierrez and
Marasigan, such agreement cannot bind the petitioner whose consent was not obtained and who was not privy
to the loan agreement. Hence, only Gutierrez is bound by the contract of loan.

True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the hands of
Marasigan. This act, however, does not constitute sufficient authority to borrow money in his behalf and neither
should it be construed as petitioner’s grant of consent to the parties’ loan agreement. Without any evidence to
prove Gutierrez’ authority, the petitioner’s signature in the check cannot be taken, even remotely, as sufficient
authorization, much less, consent to the contract of loan. Without the consent given by one party in a purported
contract, such contract could not have been perfected; there simply was no contract to speak of. 15

With the loan issue out of the way, we now proceed to determine whether the petitioner can be made liable
under the check he signed.

II. Liability Under the Instrument

The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable Instruments
Law (NIL) which states:

Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a
blank paper delivered by the person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any person who became a party thereto prior
to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time.
But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority
given and within a reasonable time.

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a
pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that
person is deemed to have prima facie authority to fill it up. It merely requires that the instrument be in the
possession of a person other than the drawer or maker and from such possession, together with the fact that the
instrument is wanting in a material particular, the law presumes agency to fill up the blanks. 16

In order however that one who is not a holder in due course can enforce the instrument against a party prior to
the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly in accordance with
the authority given; and (2) it must be filled up within a reasonable time. If it was proven that the instrument had
not been filled up strictly in accordance with the authority given and within a reasonable time, the maker can set
this up as a personal defense and avoid liability. However, if the holder is a holder in due course, there is a
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conclusive presumption that authority to fill it up had been given and that the same was not in excess of
authority.17

In the present case, the petitioner contends that there is no legal basis to hold him liable both under the contract
and loan and under the check because: first, the subject check was not completely filled out strictly under the
authority he has given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

The Negotiable Instruments Law (NIL) defines a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.(emphasis supplied)

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for
value." It also provides in Section 52(d) that in order that one may be a holder in due course, it is necessary that
at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which could beset up
against a prior holder of the instrument.18 It means that he does not have any knowledge of fact which would
render it dishonest for him to take a negotiable paper. The absence of the defense, when the instrument was
taken, is the essential element of good faith. 19

As held in De Ocampo v. Gatchalian:20

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced
upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had notice that there
was something wrong about his assignor's acquisition of title, although he did not have notice of the particular
wrong that was committed.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud.
It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is
knowledge of such facts that his action in taking the note amounted bad faith.

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial sense. The
manner in which the defendants conducted their Liberty Loan department provided an easy way for thieves to
dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon
the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts.
(emphasis supplied).

In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of loan,
and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad faith. The
following exchange is significant on this point:
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WITNESS: AMBET NABUS

Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?

A: Since I celebrated my birthday in that place where Nap and I live together with the other crew, there were
several visitors that included Danny Espiritu. So a week after my birthday, Bong Marasigan called me up again
and he was fuming mad. Nagmumura na siya. Hinahanap niya si… hinahanap niya si Nap, dahil pinagtataguan na
siya at sinabi na niya na kailangan I-settle na niya yung utang ni Nap, dahil…

xxxx

WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang tsekeng tumalbog…
(He told me that we have to fix it up before it…) mauwi pa kung saan…

xxxx

Q: What was your reply, if any?

A: I actually asked him. Kanino ba ang tseke na sinasabi mo?

(Whose check is it that you are referring to or talking about?)

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

A: I told him do you know that it is not really Alvin who borrowed money from you or what you want to appear…

xxxx

Q: What was his reply?

A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito.(T.S.N., Ambet Nabus, July
27, 2000; pp.65-71; emphasis supplied)21

Since he knew that the underlying obligation was not actually for the petitioner, the rule that a possessor of the
instrument is prima facie a holder in due course is inapplicable. As correctly noted by the CA, his inaction and
failure to verify, despite knowledge of that the petitioner was not a party to the loan, may be construed as gross
negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally barred
from recovery. The NIL does not provide that a holder who is not a holder in due course may not in any case
recover on the instrument.22 The only disadvantage of a holder who is not in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.23 Among such defenses is the filling up blank not
within the authority.

On this point, the petitioner argues that the subject check was not filled up strictly on the basis of the authority he
gave. He points to his instruction not to use the check without his prior approval and argues that the check was
filled up in violation of said instruction.

Check Was Not Completed Strictly Under The Authority Given by The Petitioner

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Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the blanks and
use the check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed checks to be used in their business
provided that he could only use them upon his approval. His instruction could not be any clearer as Gutierrez’
authority was limited to the use of the checks for the operation of their business, and on the condition that the
petitioner’s prior approval be first secured.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie authority does
not extend to its use (i.e., subsequent transfer or negotiation)once the check is completed. In other words, only
the authority to complete the check is presumed. Further, the law used the term "prima facie" to underscore the
fact that the authority which the law accords to a holder is a presumption juris tantumonly; hence, subject to
subject to contrary proof. Thus, evidence that there was no authority or that the authority granted has been
exceeded may be presented by the maker in order to avoid liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever secured prior approval from the petitioner to fill
up the blank or to use the check. In his testimony, petitioner asserted that he never authorized nor approved the
filling up of the blank checks, thus:

ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date, May 23, 1994?

WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the figure ₱200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words ₱200,000 only xx in this
check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).24

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the authority
when he used the check to pay the loan he supposedly contracted for the construction of petitioner's house. This
is a clear violation of the petitioner's instruction to use the checks for the expenses of Slam Dunk. It cannot
therefore be validly concluded that the check was completed strictly in accordance with the authority given by
the petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal defense
that the blanks were not filled up in accordance with the authority he gave. Consequently, Marasigan has no right
to enforce payment against the petitioner and the latter cannot be obliged to pay the face value of the check.

WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the petitioner Alvin Patrimonio's
petition for review on certiorari. The appealed Decision dated September 24, 2008 and the Resolution dated April
30, 2009 of the Court of Appeals are consequently ANNULLED AND SET ASIDE. Costs against the respondents.

SO ORDERED.

ARTURO D. BRION
Associate Justice

G.R. No. 208321 July 30, 2014

Page 9 of 343
WESLEYAN UNIVERSITY PHILIPPINES, Petitioner,
vs.
NOWELLA REYES, Respondent.

DECISION

VELASCO, JR., J.:

Nature of the Case

The issue in this petition boils down to the legality of respondent Nowella Reyes' termination as University
Treasurer of petitioner Wesleyan University - Philippines (WUP) on the ground of loss of trust and confidence.
Petitioner prays in this recourse that We reverse the February 28, 2013 Decision of the Court of Appeals (CA) in
CA-G.R. SP No. 122536 which declared respondent's termination illegal.

The Facts

On March 16, 2004, respondent Nowella Reyes was appointed as WUP's University Treasurer on probationary
basis. A little over a year after, she was appointed as full time University Treasurer.

On April 27, 2009, a new WUP Board of Trustees was constituted. Among its first acts was to engage the services
of Nepomuceno Suner & Associates Accounting Firm (External Auditor) to investigate circulating rumors on
alleged anomalies in the contracts entered into by petitioner and in its finances.

Discovered following an audit were irregularities in the handling of petitioner’s finances, mainly, the encashment
by its Treasury Department of checks issued to WUP personnel, a practice purportedly in violation of the imprest
system of cash management, and the encashment of various crossed checks payable to the University Treasurer
by Chinabank despite management’s intention to merelyhave the funds covered thereby transferred from one of
petitioner’s bankaccounts to another. The External Auditor’s report embodied the following findings and
recommendations:1

Treasury Department (Cash Management):

Findings:

1. It was noted that checks consisting of various checks payable to teachers, staffs and other third parties
had been the subject of encashment directly with the Treasury Department under the stewardship of
Mrs. Nowella A. Reyes,the University Treasurer. This practice is a clear violation of imprest system of cash
management, hence, resulting to unsound accounting practice. This laxity in cash management of those
checks were paid as intended for them. Recommendations:

For internal control reasons, the treasury should not accept any check encashment from its daily
collections. Checks are being issued for encashment with our depository bank for security reasons. The
mere acceptance of checks from the collections is tantamount to cash disbursement out of collections.

Findings:

2. It was also noted that various checks payable to the Treasurer of WUP x x x had been negotiated for
encashment directly to China Bank – Cabanatuan Branch, while the intention of the management for
these checks were merely for fund transfer with the other account maintained at China Bank. This
practice is a violation not only in the practice of accounting/cash custodianship but had been mingled
with spurious elements. Unfortunately, check vouchers relating to this exception are nowhere to be found
or not on file.

Findings:
Page 10 of 343
 3. A crossed check payable to the Treasurer – [WUP] x x x had been negotiated for encashment to China
Bank – Cabanatuan Branch despite of the restriction indicated in the face of the check. Unfortunately, the
used check was no longer found on file.

As a result of said audit, petitioner served respondent a Show Cause Order and placed her under
preventive suspension.2 The said Show Cause Order required her to explain the following matters found
by the External Auditors:

(a) your encashment of Php300,000.00 ofa crossed check you issued payable to yourself
(Chinabank Check No. 000873613 dated 26 November 2008) x x x;

(b) the encashment of various checks without any supporting vouchers x x x;

(c) unliquidated cash advances in the aggregate amount of Php9.7 million x x x. 3

On June 18, 2009, respondent submitted her Explanation. Following which, WUP’s Human Resources
Development Office (HRDO) conducted an investigation. Finding respondent’s Explanation unsatisfactory, the
HRDO, on July 2, 2009, submitted an Investigation Report 4 to the University President containing its findings and
recommending respondent’s dismissal as University Treasurer.

Upon receipt of her notice of termination on July 9, 2009, respondent post-haste filed a complaint for illegal
dismissal with the Arbitration Branch of the National Labor Relations Commission. She contended that her
dismissal was illegal, void and unjust, for the following reasons:

First,her 60-day preventive suspension violated the Labor Code provisions prohibiting such suspensions tolast for
more than thirty (30) days. Thus, the fact that she was not reinstated to her former position before the lapse of
thirty (30) days, amounted to constructive dismissal; 5 Second,there was a violation of her right to substantive and
procedural due process, as evidencedby petitioner’s failure to apply the pertinent due process provisions under
its Administrative and Personnel Policy Manual; 6 and

Finally,the charges against her werebased on mere suspicion and speculations and unsupported by evidence. 7

Petitioner, for its part, predicated its defense on the contention that respondent was a highly confidential
employee who handled significant amounts of money as University Treasurer and that the irregularities attributed
to her in the performance ofher duties justify her dismissal on the basis of loss of trust and confidence. 8

Petitioner also averred that the 60-day preventive suspension thus imposed does not necessarily make
suchsuspension void, inasmuch as the law merely requires that after a 30-day preventive suspension, the affected
employee shall automatically be reinstated. But in the case of respondent, there was no need for her automatic
reinstatement inasmuch as she was duly terminated within the 30-day period of her preventive
suspension.9Moreover, respondent was duly afforded her right to due process since WUP substantially complied
with the twin-notice rule.

Ruling of the Labor Arbiter

On December 15, 2010, Labor Arbiter Reynaldo V. Abdon rendered a Decision finding for respondent. The
dispositive portion of the Labor Arbiter Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered, DECLARING that complainant Nowella Reyes x
x x [was] illegally dismissed by respondent Wesleyan University Philippines.

Accordingly, respondent Wesleyan University Philippines through its President is hereby DIRECTED to:

(1) Reinstate complainant Nowella Reyes to her former or equivalent position without loss of seniority
right;
Page 11 of 343
 (1.1) Since reinstatement is immediately executory, to render a Report of Compliance to this
Office within ten (10) days from receipt of this Decision.

(2) Pay complainant Reyes her backwages, from the time of her dismissal until reinstatement, the present
sum of which is ₱429,000.00;

(3) Pay complainant Reyes, her 13th month pay in the sum of ₱52,000; her shared (sic) in related learning
experience fee, ₱12,000.00; clothing allowance, ₱6,000.00; Honorarium as member of standing
committees, ₱4,000.00; and her vacation leave credits in the sum of ₱17,862.59;

(4) Pay complainant Reyes, moral damages in the sum of ₱150,000.00, exemplary damages in the amount
of ₱100,000.00, and 10% attorney’s fees in the sum of ₱77,086.25;

xxxx

SO ORDERED.10

The Labor Artbiter noted, as respondent has insisted, that the charges against the latter were based on mere
rumors and speculations. As observed too by the Labor Arbiter, petitioner itself was in the wrong because it had
no proper policies on its accounting and financial procedures and that the encashment and accommodation of
checks to personnel, especially after banking hours, had been the practice of its previous and present
administrations. Thus, it was unfair to put all the blame on respondent without any evidence that her actionswere
highly irregular, unfair or unjustified.11

As regards petitioner’sfindings on the alterations in the Check Disbursement Voucher (CDV), unliquidated cash
advances and duplicate checks, the Labor Arbiter found and wrote:

Anent the alleged finding of the university that there was material alteration on the documents as regards the
Check Disbursement Voucher (CDV), for allegedly there was an absence of Board Resolution entry in the CDV
filed in the Accounting while the copy submitted by the Treasurer has a Board Resolution entry as well as the
word ATM on the payee portion on the photocopy as crossed out while in the original it was not crossed out,
respondent cannot summarily state that complainant was at fault. The Human Resource should have conducted
an in-depth investigation on this matter. Unfortunately, respondent just followed the twin-notice rule, and did not
conduct a thorough administrative investigation in accordance with their own internal rules and policies in the
Manual. Consequently, this Office has serious doubt that such matter was the fault of the complainant for the
blame may fall on the accounting personnel who is handling the CDV.

With respect to the unliquidated cash advances, it is not likewise the fault of the complainant. She pointed out
that follow ups of the liquidation is [sic] being handled by the auditor, while respondent claims that she was
previously handling the same before it was transferred to Accounting Office in August 2008. We see no evidence
to prove that the liquidation is being handled by the complainant prior to August 2008. Moreover, it is common
practice thatthe Treasurer disburses the funds such as cash advances but the liquidation must be done by the
beneficiary of the fund, and the responsible people who should follow up the liquidation is the accounting office.

With respect to the duplicate checks, the same were done by a syndicate or individuals not connectedwith the
University. The bank has already admitted responsibility in the encashment of these checks and had returned the
amounts to the respondent University, thus complainant has no fault about this incident.12

Ruling of the NLRC

Petitioner filed an appeal withthe National Labor Relations Commission (NLRC) which was granted in the
tribunal’s Decision dated July 11, 2011, declaring that respondentwas legally dismissed. However, petitioner was

Page 12 of 343
ordered to pay respondent her proportionate 13th month pay, the monetary value of her vacation leave, and
attorney’s fees.

Adopting a stance entirely opposite to that of the Labor Arbiter, the NLRC held that respondent failed to
controvert and disprove the established charges of petitioner (as appellant-respondent) and insteadconveniently
put the blame on other departments for her inculpatory acts. The NLRC opined that her termination was not
motivated by the change of petitioner’s officers but by the University’s goal to promote the economy and
efficiency of its Treasury Department.13

In net effect, the NLRC found petitioner’s contention of loss of trust and confidence in respondent with sufficient
basis. While respondent, so the NLRC notes, may not have been guilty ofwillful breach of trust, the fact that she
held a highly confidential position, and considering that anomalous transactions transpired under her command
responsibility, provided petitioner with ample ground todistrust and dismiss her. 14 The NLRC explained:

In this case, complainant-appellee [herein respondent] may not have been guilty of willful breach of trust. But as
Treasurer of [WUP] who handles and supervises all monetary transactions in the University and being a highly
confidential employee at that, holding trust and confidence and after considering the series of irregular and
anomalous transactions that transpired under complainant-appellee’s command responsibility, respondent has
basis or ample reason to distrust complainant-appellee. Thus, we cannot justly deny [WUP] the authority to
dismiss complainant-appellee.

The principle of respondent (sic) superior or command responsibility may be cited as basis for the termination of
employment of managerial employees based on loss of trust and confidence. In the Etcuban case (Ibid) the
Supreme Court in upholding the validity of petitioner-employee’s dismissal on the ground of loss of trust and
confidence, ruled that even if the employee x x x had no actual and direct participation in the alleged anomalies,
his failure to detect any anomaly that would normally fall withinthe scope of his work reflects his ineffectiveness
and amounts to gross negligence and incompetence which are likewise justifiable grounds for his irregularity, for
what is material is that his actuations were more than sufficient to sow in his employer the seed of mistrust and
loss of confidence.

As found by the External Auditor, complainant-appellee should have implemented an imprest system of cash
management in order to secure the indicated payees in those checks and they were paid of the checks as
intended for them. It appears that checks payable to teachers, staffs and other third parties had beenthe subject
of encashment directly with the Treasury Department x x x and this is an unsound accounting practice.

Moreover, the External Auditors found that various checks payable to the Treasurer of Wesleyan University has
been negotiated for encashment directly to China Bank-Cabanatuan Branch while the intention of the
management for those checks weremerely for fund transfer with the other account maintained at China Bank.
That this practice violated accounting or cash custodianship and check vouchers are nowhere to be found.

Further, the crossed check payable to the Treasurer (complainantappellee) in the amount of ₱300,000.00 dated
26 November 2008 had been negotiated for encashment to China Bank – Cabanatuan Branch despite of
restriction indicated in the face of the check and that the used check was no longer found on file. There is a need
for a clear policy when to issue crossed-checks or otherwise and the use of debit/credit memo to transfer one
account to another with the same bank. That these acts of violation of cash and check custodianship by
complainant-appellee resulted in the loss of respondent-appellant thus affecting the economy of the respondent-
appellant institution.

In view of our finding that respondents-appellants (sic) has validly terminated complainant-appellee the latter’s
claim for damages and attorney’s fees lacks sufficient factual and legal basis. Accordingly, the Labor Arbiter’s
decision directing the reinstatement of complainantappellee with full backwages ishereby vacated and set aside. 15

The NLRC denied respondent’s motion for reconsideration in a Resolution dated September 29, 2011.Therefrom,
respondent went on Certiorari to the CA, inCA-G.R. SP No. 122536.

Page 13 of 343
Ruling of the Court of Appeals

On February 28, 2013, the CA, through its assailed Decision, 16 found the NLRC’s ruling tainted with grave abuse of
discretion and reinstated the Decision of the Labor Arbiter. The fallo of the CA Decision reads:

WHEREFORE, premises considered, the assailed Decision and Resolution of the National Labor Relations
Commission dated July 11, 2011 and September 29, 2011 are REVERSED and SET ASIDE. The Decision of the Labor
Arbiter dated December 15, 2010 is hereby REINSTATED, subject to the modification that if reinstatement is no
longer feasible, petitioner shall be awarded separation pay equivalent to one month salary for every year
ofservice reckoned from the time of employment to the finality of this decision.17

Holding that respondent’s termination was unjust, the CA, in virtual restoration of the findings and conclusions of
the Labor Arbiter, pointed out, among others, that: (1) respondent sufficiently countered all charges against her;
(2) it had been the practice of the previous and present administrations of petitioner to encash and
accommodate checks of WUP personnel; thus, it would be unjust to penalize respondent for observing a practice
already in place when she assumed office; (3) the duty to liquidate cash advances is assigned to the internal
auditor; (4) it has been established that the encashments of spurious duplicate checks were perpetrated by
individuals not connected with WUP, and that the bank admitted responsibility therefor and had returned the
amount involved to petitioner; (5) there was no imputation of any violation of the University’s Administration and
Personnel Policy Manual; (6) while the acts complained of violated the imprest system of cash management, there
was no showing that the said system had been adopted and observed in the school’s accounting and financial
procedures; and (7) there was no showing that respondent had the responsibility to implement changes in
petitioner’s accounting system even if it were not in accordance with the generally accepted principles of
accounting.18

Hence, the instant petition.

The Issues

For consideration herein are the following issues raised by petitioner:

1. Whether or not the CA over-reached its power of review under Rule 65 of the Rules of Court when it
reversed the judgment of the NLRC; and

2. Whether or not the CA erred in finding respondent illegally dismissed by petitioner on the ground of
loss of trust and confidence.

The Court’s Ruling

The petition is impressed with merit. The CA erred in reinstating the Labor Arbiter’s Decision and in finding that
respondent was illegally dismissed.

The CA’s power of review

We first resolve the procedural issue raised in this recourse. Petitioner contends that the CA over-reached its
power of review under Rule 65 when it substituted its own judgment over errors of judgment that it found in the
NLRC Decision, stressing that the province of a writ of certiorari is to correct only errors of jurisdiction and not
errors of judgment.

This contention is misplaced. It is settled that under Section 9 of Batas Pambansa Blg.129,19 as amended by
Republic Act No. 7902,20 the CA, pursuant to the exercise of its original jurisdiction over petitions for certiorari, is
specifically given the power to pass upon the evidence, if and when necessary, to resolve factual issues. Sec. 9
clearly states:

Page 14 of 343
The Court of Appeals shall have the power to try cases and conduct hearings, receive evidence and perform any
and all acts necessary to resolve factual issues raised in cases falling within its original and appellate jurisdiction,
including the power to grant and conduct new trials or further proceedings. x x x

Hence, the appellate court acted within its sound discretion when it re-evaluated the NLRC’s factual findings and
substituted the latter’s own judgment.

Loss of trust and confidence as a ground for termination

We now proceed to the substantive issue on the propriety of respondent’s dismissal due to loss of trust and
confidence.As provided in Art. 282(c) of Presidential Decree No. 442, otherwise known as the Labor Code of the
Philippines:

Article 282. Termination by employer.An employer may terminate an employment for any of the following causes:

xxxx

c. Fraud or willful breach by the employee of the trust reposed in him by his employer or duly authorized
representative;

We explained in M+W Zander Philippines, Inc. v. Enriquez21 the requisites of a valid dismissal based on loss of
trust and confidence. As the case elucidates:

Article 282 (c) of the Labor Code allows an employer to terminate the services of an employee for loss of trust
and confidence. Certain guidelines must be observed for the employer to terminate an employee for loss of trust
and confidence. We held in General Bank and Trust Company v. Court of Appeals, viz.:

[L]oss of confidence should not be simulated. It should not be used as a subterfuge for causes which are
improper, illegal, or unjustified. Loss of confidence may not be arbitrarily asserted in the face of overwhelming
evidence to the contrary. It must be genuine, not a mere afterthought tojustify earlier action taken in bad faith.

The first requisite for dismissal on the ground of loss of trust and confidence is that the employee concerned
must be one holding a position of trust and confidence.

There are two classes of positions of trust: managerial employees and fiduciary rank-and-file employees.

Managerial employees are defined as those vested with the powers or prerogatives to lay down management
policies and to hire, transfer, suspend, lay-off, recall, discharge,assign or discipline employees or effectively
recommend such managerialactions. They refer to those whose primary duty consists of the management of the
establishment in which they are employed or of a department or a subdivision thereof, and to other officers or
members of the managerialstaff. Officers and members of the managerial staff perform work directlyrelated to
management policies of their employer and customarily and regularly exercise discretion and independent
judgment.

The second class or fiduciary rank-and-file employees consist of cashiers, auditors, property custodians, etc., or
those who, in the normal exercise of their functions, regularlyhandle significant amounts of money or property.
These employees, though rank-and-file, are routinely charged with the care and custody of the employer’s
money or property, and are thus classified as occupying positions of trust and confidence. 22

xxxx

The second requisite of terminating an employee for loss of trust and confidence is that there must be an act that
would justify the loss of trust and confidence. To be a valid cause for dismissal, the loss of confidence must be
based on a willful breach of trust and founded on clearly established facts. 23

Page 15 of 343
To summarize, the first requisite is that the employee concerned must be one holding a position of trust and
confidence, thus, one who is either: (1) a managerial employee; or (2) a fiduciary rank-and-file employee, who, in
the normal exercise of his or her functions, regularly handles significant amounts of money or property of the
employer. The secondrequisite is that the loss of confidence must be based on a willful breach of trust and
founded on clearly established facts.

In Lima Land, Inc. v. Cuevas,24 We discussed the difference between the criteria for determining the validity of
invoking loss of trust and confidence as a ground for terminating a managerial employee on the one hand and a
rank-and-file employee on the other. In the said case, We held that with respect to rank-and-file personnel, loss
of trust and confidence, as ground for valid dismissal,requires proof of involvement in the alleged events in
question, and that mere uncorroborated assertions and accusations by the employer would not suffice.
Withrespect to a managerial employee, the mere existence of a basis for believing that such employee has
breached the trust of his employer would suffice for his dismissal. The following excerpts from Lima Land are
instructive:

As firmly entrenched in our jurisprudence, loss of trust and confidence, as a just cause for termination of
employment, is premised on the fact that an employee concerned holds a position where greater trust is placed
by management and from whom greater fidelity to duty is correspondingly expected. This includes managerial
personnel entrusted with confidence on delicate matters, such as the custody, handling, or care and protection of
the employer’s property.The betrayal of this trust is the essence of the offense for which an employee is
penalized.

It must be noted, however, that ina plethora of cases, this Court has distinguished the treatment of managerial
employees from that of rank-and-file personnel, insofar as the application of the doctrine of loss of trust and
confidence is concerned. Thus, with respect to rank-and-file personnel, loss of trust and confidence, as ground for
valid dismissal, requires proof of involvement in the alleged events in question, and that mere uncorroborated
assertions and accusations by the employer will not be sufficient. But as regards a managerial employee, the
mere existence of a basis for believing that such employee has breached the trust of his employer would suffice
for his dismissal. Hence, in the case of managerial employees, proof beyond reasonable doubt is not required, it
being sufficient that there is some basis for such loss of confidence, such as when the employer has
reasonableground to believe that the employee concerned is responsible for the purported misconduct, and the
nature of his participation therein renders him unworthy of the trust and confidence demanded of his position.

On the other hand, loss of trust and confidence as a ground of dismissal has never been intended to afford an
occasion for abuse because of its subjective nature. It should not be used as a subterfuge for causes which are
illegal, improper, and unjustified. It must be genuine, not a mere afterthought intended to justify an earlier action
taken in bad faith. Let it not be forgotten that what is at stake is the means of livelihood, the name, and the
reputation of the employee. To countenance an arbitrary exercise of that prerogative is to negate the employee’s
constitutional right to security of tenure. 25

Respondent’s employment classification is irrelevant in light of her proven willful breach

There is no doubt that respondent held a position of trust; thus, greater fidelity is expected of her. She was not an
ordinary rank-and-file employee but an employee occupying a very sensitive position. As University Treasurer,
she handled and supervised all monetary transactions and was the highest custodian of funds belonging to
WUP.26 To be sure, in the normal exercise of her functions, she regularly handled significant amounts of money of
her employer and managed a critical department.

The presence of the first requisite iscertain. So is as regards the second requisite. Indeed, the Court finds that
petitioner adequately proved respondent’s dismissal was for a just cause, based on a willful breach of trust and
founded on clearly established facts as required by jurisprudence. At the end of the day, the question of whether
she was a managerial or rank-andfile employee does not matter in this case because not only is there basis for
believing that she breached the trust of her employer, her involvement in the irregularities attending to
petitioner’sfinances has also been proved.

Page 16 of 343
To recall, petitioner, per its account, allegedly lost trust and confidence in respondent owing to any or an
interplay of the following events: (1) she encashed a check payable to the University Treasurer in the amount of
three hundred thousand pesos (PhP 300,000); (2) she encashed crossed checks payable to the University
Treasurer, when the intention of management in this regard was to merely transfer funds from one of petitioner’s
accounts to another in the same bank; (3) she allowed the Treasury Department to encash the checks issued to
WUP personnel rather than requiring the latter to have said checks encashed by the bank, in violation of the
imprest system of accounting; (4) she caused the disbursement of checks without supporting check vouchers; (5)
there were unliquidated cash advances; and (6) spurious duplicate checks bearing her signature were encashed
causing damage to petitioner.

We disagree with the CA’s finding that respondent has sufficiently countered all inculpatory allegations and
accusations against her. On the contrary, We find that here, there was anadmitted, actual and real breach of duty
committed by respondent, which translates into a breach of trust and confidence in her. For perspective,
respondent’s explanation as to the charges against her is as follows:

1. That the alleged crossed check issued by her payable to THE TREASURER – WUP was done in the
exercise of her duty and function as such, and not with her name and not to herself and personal favor,
and that said check had been prepared passing through the usual system; 2. That the University heads
were the beneficiaries of said amount who strongly requested that their love giftbe given, hence, the
encashment;

3. That the amount of the check was properly disposed of as evidenced by the document bearing the
signatures of recipients;

4. That the Office to pointto if vouchers and supporting documents will have to be checked concerning
payments made is the Accounting Office;

5. That cash advances to various University personnel pass through her office in the exercise of her duties
assuch but the office who follow up the liquidation of payments received is the Office of the University
Auditor;

6. That respondent Reyes adopted her reply on the show-cause order in the investigation previously
conducted by Dr. Jeremias Garcia about the duplicated checks alleging among others:

a) She and her staff confirmed that only the checks issued to General Capulong and Leodigario
David were encashed by the University Teller;

b) The check issued to Norma de Jesus was encashed by the Pick-up Chinabank Teller on
December 5, 2008 while collecting deposits from the University with the assistance of the
University teller;

c) That the check issued to Mercedes was not encashed with the University teller but with
WEMCOOP;

d) As to the encashment and accommodation of checks to personnel, it has been the practice of
previousand present administration moreso when employees cannot anymore go to Chinabank
to transact business as it is mostly beyond banking hours when checks are ready for
disbursement;

e) That Respondent’s department has no control over fraudulent transactions done outside the
University, that it is the Bank’s duty to protect its clients as tothe proper procedures to secure
our account;

f) That the computer system program of the University’s depository bank has very limited
capabilities to detect fraudulent entries;
Page 17 of 343
 g) That the signature verifier also had been remiss in carefully checking the authenticity
ofprevious signatories.27

a. Respondent’s encashment of checks

As it were, respondent did not deny, in fact admitted, the encashment of the three hundred thousand peso (PhP
300,000) crossed check payable to the University Treasurer which covered the total amount of the "love gift" for
administrative and academic officials of WUP. Neither did she deny the fact that the Treasury Department
encashed checks issued to WUP personnel rather than requiring them to have the checks encashed by the bank.
Instead, she explained that the beneficiaries of the amounts strongly requested that their love gifts be given in
cash, hence the encashment of the PhP 300,000 crossed check and, thereafter, the accommodation and
encashment of their checks directly by the Treasury Department. Moreover, she submitted a document bearing
the signatures of the recipients of the "love gift" as proof that the amount was disposed properly. 28 She further
insisted that this was the usual practice of the University and that she merely accommodated the requests of
WUP personnel especially when Chinabank was already closed.

Jurisprudence has pronounced that the crossing of a check means that the check may not be encashed but only
deposited in the bank.29 As Treasurer, respondent knew or is at least expected to be aware of and abide by this
basic banking practice and commercial custom. Clearly, the issuance of a crossed check reflects management’s
intention to safeguard the funds covered thereby, its special instruction to have the same deposited to another
account and its restriction on its encashment.

Here, respondent, as aptly detailed inthe auditor’s report, disregarded management’s intentions and ignored the
measures in place to secure the handling of WUP’s funds. By encashing the crossed checks, respondent put the
funds covered thereby under the riskof being lost, stolen, co-mingled with other funds or spent for other
purposes. Furthermore, the accommodation and encashment by the Treasury Department of checks issued to
WUP personnel were highly irregular. First, WUP, not being a bank, had no business encashing the checks of its
personnel.30 More importantly, in encashing the said checks, the Treasury Department made disbursements
contrary to the wishes ofmanagement because, in issuing said checks, management has madeclear its intention
that monies therefor would be sourced from petitioner’s deposit with Chinabank, under a specific account, and
not from the cash available in the Treasury Department.

That the encashment of crossed checks and payment of checks directly to WUP personnel had been the practice
of the previous and present administration of petitioner is of no moment. To Our mind, this was simply
respondent’s convenient excuse, a poorlydisguised afterthought, when her unbecoming carelessness in managing
WUP’s finances was exposed. Moreover, the prevalence of this practice could have been contained if only
respondent consistently observed the regular procedure for encashing crossed checks and properly handled
requests for accommodation of checks issued to the WUP personnel.

b. Unliquidated cash advances

On the matter of unliquidated cash advances in the aggregate amount of nine million seven hundred thousand
pesos (PhP 9,700,000), respondent explained that while it was true that cash advances to WUP personnel passed
through her office in the exercise of her duties as University Treasurer, the office that follows up the liquidation of
advances received is the office of the University Auditor. 31 However, granting that the responsibility of handling
the liquidation of cash advances is no longer lodged in her office, there is proof showing that before the Treasury
Department was relieved of said responsibility, the total unliquidated cash advances was even bigger, amounting
to eleven million five hundred thirty-three thousand two hundred thirty pesos and thirty-seven centavos (PhP
11,533,230.37). There is nothing in the records before us showing that respondent denied the following findings in
the Investigation Report of the WUP’s Human Resource Development Office (HRDO)on this matter, to wit:

In the matter of unliquidated cash advances in the aggregate amount of Php9.7million as found by the External
Auditors, respondent’s contention was that cash advances tovarious University personnel pass through her office
in the exercise of her duties as such but the office who follows up the liquidation of payments received is the
Office of the University Auditor.
Page 18 of 343
On the inquiry done x x x of the Internal Auditor, Treasury and Accounting officer on July 1, 2009, it was found out
that the responsibility of handling cash advances and liquidation report was transferred from Treasury Office to
Accounting Office on August 2008, when Ms. Luzviminda Torres, the personnel handling the same detailed at the
Treasury Office went on leave. It was transferred to Ms. Julieta Mateo. What was surprising was that as per
certification and summary submitted by Ms. Mateo, the amount of unliquidated cash advances previous to
August 2008, when the same was under the responsibility of the Treasury Office, was even bigger with the total
amount of ELEVEN MILLION FIVE HUNDRED THIRTY THREE THOUSAND, TWO HUNDRED THIRTY PESOS AND
THIRTY SEVEN CENTAVOS (Attached as Annex "G")

Even if there is truth in the contention of herein Respondent that she was no longer the one in charge of the
liquidation proceedings, the same would not absolve her from gross negligence of duties. The fact that the said
function was with her office until August 2008, with unliquidated cash advances even bigger, still showed that she
reneged in her duties which she had overlooked for so long. She now mistakenly points the responsibility to the
Office of the University Auditor. These informations are enough to be considered as Respondent’s acts
constitutive of breach of trust and confidence. 32

xxx

c. Other irregularities inrespondent’s performance

In all, We find the Investigation Report of the HRDO a credible, extensive and thorough account of respondent’s
involvementin incidents which are sufficient grounds for petitioner’s loss of trust and confidence in her, to wit:

Respondent Nowella C. Reyes has committed breach of trust and confidence in the conduct of her office.

In her answer, Respondent admitted the encashment of the crossed check with the defense that the same was
done in the performance of her duty, not for her personal use but because of the request of University heads
who wanted their love gifts begiven. She alsoadmitted habitual encashment of checks issued by the University to
its personnel on the basis of practice of previous administration.

The charge against Respondent of the act of improper encashment of a check, which aside from being irregular is
clearly violative of imprest system of cash management. Moreover, the same being a crossed check, should not
be negotiated for encashment to Chinabank – Cabanatuan Branch because of the restriction indicated on its face,
which Mrs. Reyes, by reason of her office knew very well.

During the investigation conducted, it was revealed that the check disbursement voucher attached by
Respondent on her answer to justify the regularity of its issuance and eventual encashment was not exactly the
same as the one filed at the Accounting Office. It showed that the photocopy of the original CDV which was
attached by Respondent (attached as Annex "E"of this report) bear some material alterations, namely:

1. The absence of entry of the Board Resolution which was reflected as a sort of inquiry by the Internal
Auditor, and which at present was left blank on the original, as compared to the photocopy submitted by
respondent bearing an entry of the Board Resolution number;

2. The word ATM on the payee portion of the CDV in the original as compared to the photocopy wherein
the entry ATM was crossed out.

During a discussion with the external auditors, it was categorically stated by them that during the courseof
external audit, said document was inexistent in the records presented by the Accounting and Treasurer’s Offices.
The production of the photocopy by Respondent already altered only after the suspension was effected cast
doubt on the regularity of its issuance, negating her otherwise claim. Another significant observation was that the
original copy of CDV (attached as Annex "F" of this report) and corresponding signatures of administrative heads
who received payments showed folded marks halfways, with the fastener holes unmatched, showing that those
two documents were not really filed together, as regularly done, and the same were not filed in the regular

Page 19 of 343
course and must have been kept previously on a different manner in possession of person other than the office
which must file the same.

xxxx

On the last charge in the show cause order specifically the existence of duplicate checks in the account of the
University amounting to Php 1.050 Million, included in Respondent’s defenses were that among the checks
duplicated, only two of them were encashed with the University Teller, and the check originally named to Norma
de Jesus as payee was paid by the pick-up teller only through the assistance of the University teller.

Again, Respondent’s defense were void of truth and merit. The act of encashing checks issued by the Treasury
Office, clearly violative of imprest system of cash management which Mrs. Reyes by reason of her office knew
very well, showed that Respondent directly reneged in her duty to observe economic security measures.

As found on the documents attachedto the Investigation report of Dr. Garcia which had been expressly adopted
by herein respondent in her answer is an Affidavit of Norma de Jesus stating that she actually encashed the check
with the personnel of the Treasury Office particularly Shirley Punay, who gave her the amountequivalent days
after the check was handed to the Treasury office.

However noble the intention of herein Respondent in helping her fellow workers in the University by her acts of
accommodation by encashing their checks directly withthe Treasury Office when Chinabank was already closed,
the same still reneged in her duty to protect the economic security of the University. An act of misconduct which
caused [sic]33

An employer cannot be compelled toretain an employee who is guilty of acts inimical to the interests of the
employer. A company has the right to dismiss its employees if only as a measure of self-protection. This is all the
more true in the case of supervisors or personnel occupying positions of responsibility.34 In this case, let it be
remembered that respondent was not an ordinary rank-and-file employee as she was no less the Treasurer who
was in charge of the coffers of the University. It would be oppressive to require petitioner to retain in their
management an officer who has admitted to knowingly and intentionally committing acts which jeopardized its
finances and who was untrustworthy in the handling and custody of University funds.

WHEREFORE, premises considered, we GRANTthe petition. The assailed Decision of the Court of Appeals in CA-
G.R. SP No. 122536 is, thus, SET ASIDE. The Decision of the National Labor Relations Commission in NLRC RAB III
Case No. 07-15131-09 is REINSTATED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

G.R. No. 176697 September 10, 2014

CESAR V. AREZA and LOLITA B. AREZA, Petitioners,

vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO, Respondnets.

DECISION

PEREZ, J.:

Before this Court is a Petition for Review on Certiorari under Ruic 45 of the Rules of Court, which seeks to reverse
the Decision1 and Resolution2 dated 29 June 2006 and 12 February 2007 of the Court of Appeals in CAG.R. CV No.
83192. The Court of Appeals affirmed with modification the 22 April 2004 Resolution3 of the Regional Trial Court
(RTC) of Calamba, Laguna, Branch 92, in Civil Case No. B-5886.
Page 20 of 343
The factual antecedents follow.

Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent Express Savings
Bank’s Biñan branch: 1) Savings Account No. 004-01-000185-5 and 2) Special Savings Account No. 004-02-
000092-3.

They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles. On 2 May
2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand
Mitsubishi Pajero and a brand-new Honda CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to
different payees and drawn against the Philippine Veterans Bank (drawee), each valued at Two Hundred
Thousand Pesos (₱200,000.00) for a total of One Million Eight Hundred Thousand Pesos (₱1,800,000.00).

About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the branch manager of
respondent Express Savings Bank (the Bank) was present during the transaction and immediately offered the
services of the Bank for the processing and eventual crediting of the said checks to petitioners’ account. 4 On the
other hand,Potenciano countered that he was prevailed upon to accept the checks by way of accommodation of
petitioners who were valued clients of the Bank. 5

On 3 May 2000, petitioners deposited the said checks in their savings account with the Bank. The Bank, inturn,
deposited the checks with its depositary bank, Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI Bank presented
the checks to the drawee, the Philippine Veterans Bank, which honored the checks.

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank werehonored. He
allegedly warned petitioners that the clearing of the checks pertained only to the availability of funds and did not
mean that the checks were not infirmed.6 Thus, the entire amount of ₱1,800,000.00 was credited to petitioners’
savings account. Based on this information, petitioners released the two cars to the buyer.

Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on the ground that the amount
on the face of the checks was altered from the original amount of ₱4,000.00 to ₱200,000.00. The drawee returned
the checks to Equitable-PCI Bank by way of Special Clearing Receipts. In August 2000, the Bank was informed by
Equitable-PCI Bank that the drawee dishonored the checks onthe ground of material alterations. Equitable-PCI
Bank initially filed a protest with the Philippine Clearing House. In February 2001, the latter ruled in favor of the
drawee Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the Bank in the
amount of ₱1,800,000.00.

The Bank insisted that they informed petitioners of said development in August 2000 by furnishing them copies
of the documents given by its depositary bank. 7 On the other hand, petitioners maintained that the Bank never
informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check was dishonored by the
Bank for the reason "Deposit Under Hold." According topetitioners, the Bank unilaterally and unlawfully put their
account with the Bank on hold. On 22 March 2001, petitioners’ counsel sent a demand letter asking the Bank to
honor their check. The Bank refused to heed their request and instead, closed the Special Savings Account of the
petitioners with a balance of ₱1,179,659.69 and transferred said amount to their savings account. The Bank then
withdrew the amount of ₱1,800,000.00representing the returned checks from petitioners’ savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and unilateral
withdrawal from their savings account, petitioners filed a Complaint for Sum of Money with Damages against the
Bank and Potenciano with the RTC of Calamba.

Page 21 of 343
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of petitioners. The dispositive
portion of the Decision reads:

WHEREFORE, the foregoing considered, the Court orders that judgment be rendered in favor of plaintiffs and
against the defendants jointly and severally to pay plaintiffs as follows, to wit:

1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the defendants from the account of
plaintiffs;

2. ₱500,000.00 as moral damages; and

3. ₱300,000.00 as attorney’s fees.8

The trial court reduced the issue to whether or not the rights of petitioners were violated by respondents when
the deposits of the former were debited by respondents without any court order and without their knowledge
and consent. According to the trial court, it is the depositary bank which should safeguard the right ofthe
depositors over their money. Invoking Article 1977 of the Civil Code, the trial court stated that the depositary
cannot make use of the thing deposited without the express permission of the depositor. The trial court also held
that respondents should have observed the 24-hour clearing house rule that checks should be returned within
24-hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. In
this case, petitioners deposited the checks in May 2000, and respondents notified them of the problems on the
check three months later or in August 2000. In sum, the trial court characterized said acts of respondents as
attended with bad faith when they debited the amount of ₱1,800,000.00 from the account of petitioners.

Respondents filed a motion for reconsideration while petitioners filed a motion for execution from the Decision of
the RTC on the ground that respondents’ motion for reconsideration did not conform with Section 5, Rule 16 of
the Rules of Court; hence, it was a mere scrap of paper that did not toll the running of the period to appeal.

On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the motion for reconsideration, set
aside the Pozas Decision, and dismissed the complaint. The trial court awarded respondents their counterclaim of
moral and exemplary damages of ₱100,000.00 each. The trial court first applied the principle of liberality when it
disregarded the alleged absence of a notice of hearing in respondents’ motion for reconsideration. On the merits,
the trial court considered the relationship of the Bank and petitioners with respect to their savings account
deposits as a contract of loan with the bank as the debtor and petitioners as creditors. As such, Article 1977 of the
Civil Code prohibiting the depository from making use of the thing deposited without the express permission of
the depositor is not applicable. Instead, the trial court applied Article 1980 which provides that fixed, savings and
current deposits ofmoney in banks and similar institutions shall be governed by the provisions governing simple
loan. The trial court then opined thatthe Bank had all the right to set-off against petitioners’ savings deposits the
value of their nine checks that were returned.

On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the award of damages. The
appellate court made the following ratiocination:

Any argument as to the notice of hearing has been resolved when the pairing judge issued the order on February
24, 2004 setting the hearing on March 26, 2004. A perusal of the notice of hearing shows that request was
addressed to the Clerk of Court and plaintiffs’ counsel for hearing to be set on March 26, 2004.

The core issues in this case revolve on whether the appellee bank had the right to debit the amount of
₱1,800,000.00 from the appellants’ accounts and whether the bank’s act of debiting was done "without the
plaintiffs’ knowledge."

We find that the elements of legal compensation are all present in the case at bar. Hence, applying the case of
the Bank of the Philippine Islands v. Court of Appeals, the obligors bound principally are at the same time
Page 22 of 343
creditors of each other. Appellee bank stands as a debtor of appellant, a depositor. At the same time, said bank is
the creditor of the appellant with respect to the dishonored treasury warrant checks which amount were already
credited to the account of appellants. When the appellants had withdrawn the amount of the checks they
deposited and later on said checks were returned, they became indebted to the appellee bank for the
corresponding amount.

It should be noted that [G]erry Mambuay was the appellants’ walkin buyer. As sellers, appellants oughtto have
exercised due diligence in assessing his credit or personal background. The 24-hour clearing house rule is not the
one that governs in this case since the nine checks were discovered by the drawee bank to contain material
alterations.

Appellants merely allege that they were not informed of any development on the checks returned. However, this
Court believes that the bank and appellants had opportunities to communicate about the checks considering that
several transactions occurred from the time of alleged return of the checks to the date of the debit.

However, this Court agrees withappellants that they should not pay moral and exemplary damages to each of the
appellees for lack of basis. The appellants were not shown to have acted in bad faith.9

Petitioners filed the present petition for review on certiorariraising both procedural and substantive issues, to wit:

1. Whether or not the Honorable Court of Appeals committed a reversible error of law and grave abuse
of discretion in upholding the legality and/or propriety of the Motion for Reconsideration filed in
violation of Section 5, Rule 15 ofthe Rules on Civil Procedure;

2. Whether or not the Honorable Court of Appeals committed a grave abuse of discretion in declaring
that the private respondents "had the right to debit the amount of ₱1,800,000.00 from the appellants’
accounts" and the bank’s act of debiting was done with the plaintiff’s knowledge.10

Before proceeding to the substantive issue, we first resolve the procedural issue raised by petitioners.

Sections 5, Rule 15 of the Rules of Court states:

Section 5. Notice of hearing. – The notice of hearing shall be addressed to all parties concerned, and shall specify
the time and date of the hearing which must not be later than ten (10) days after the filing of the motion.

Petitioners claim that the notice of hearing was addressed to the Clerk of Court and not to the adverse party as
the rules require. Petitioners add that the hearing on the motion for reconsideration was scheduled beyond 10
days from the date of filing.

As held in Maturan v. Araula,11 the rule requiring that the notice be addressed to the adverse party has
beensubstantially complied with when a copy of the motion for reconsideration was furnished to the counsel of
the adverse party, coupled with the fact that the trial court acted on said notice of hearing and, as prayed for,
issued an order12 setting the hearing of the motion on 26 March 2004.

We would reiterate later that there is substantial compliance with the foregoing Rule if a copy of the said motion
for reconsideration was furnished to the counsel of the adverse party. 13

Now to the substantive issues to which procedural imperfection must, in this case, give way.

The central issue is whether the Bank had the right to debit ₱1,800,000.00 from petitioners’ accounts.

On 6 May 2000, the Bank informed petitioners that the subject checks had been honored. Thus, the amountof
₱1,800,000.00 was accordingly credited to petitioners’ accounts, prompting them to release the purchased cars to
the buyer.
Page 23 of 343
Unknown to petitioners, the Bank deposited the checks in its depositary bank, Equitable-PCI Bank. Three months
had passed when the Bank was informed by its depositary bank that the drawee had dishonored the checks on
the ground of material alterations.

The return of the checks created a chain of debiting of accounts, the last loss eventually falling upon the savings
account of petitioners with respondent bank. The trial court inits reconsidered decision and the appellate court
were one in declaring that petitioners should bear the loss.

We reverse.

The fact that material alteration caused the eventual dishonor of the checks issued by PVAO is undisputed. In this
case, before the alteration was discovered, the checks were already cleared by the drawee bank, the Philippine
Veterans Bank. Three months had lapsed before the drawee dishonored the checks and returned them to
Equitable-PCI Bank, the respondents’ depositary bank. And itwas not until 10 months later when petitioners’
accounts were debited. A question thus arises: What are the liabilities of the drawee, the intermediary banks, and
the petitioners for the altered checks?

LIABILITY OF THE DRAWEE

Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance. The acceptor is a drawee who
accepts the bill. In Philippine National Bank v. Court of Appeals, 14 the payment of the amount of a check implies
not only acceptance but also compliance with the drawee’s obligation.

In case the negotiable instrument isaltered before acceptance, is the drawee liable for the original or the altered
tenor of acceptance? There are two divergent intepretations proffered by legal analysts. 15 The first view is
supported by the leading case of National City Bank ofChicago v. Bank of the Republic.16 In said case, a certain
Andrew Manning stole a draft and substituted his name for that of the original payee. He offered it as payment to
a jeweler in exchange for certain jewelry. The jeweler deposited the draft to the defendant bank which
collectedthe equivalent amount from the drawee. Upon learning of the alteration, the drawee sought to recover
from the defendant bank the amount of the draft, as money paid by mistake. The court denied recovery on the
ground that the drawee by accepting admitted the existence of the payee and his capacity to endorse. 17 Still, in
Wells Fargo Bank & Union Trust Co. v. Bank of Italy, 18 the court echoed the court’s interpretation in National City
Bank of Chicago, in this wise:

We think the construction placed upon the section by the Illinois court is correct and that it was not the legislative
intent that the obligation of the acceptor should be limited to the tenorof the instrument as drawn by the maker,
as was the rule at common law,but that it should be enforceable in favor of a holder in due course against the
acceptor according to its tenor at the time of its acceptance or certification.

The foregoing opinion and the Illinois decision which it follows give effect to the literal words of the Negotiable
Instruments Law. As stated in the Illinois case: "The court must take the act as it is written and should give to the
words their natural and common meaning . . . ifthe language of the act conflicts with statutes or decisions in force
before its enactment the courts should not give the act a strained construction in order to make it harmonize
with earlier statutes or decisions." The wording of the act suggests that a change in the common law was
intended. A careful reading thereof, independent of any common-law influence, requires that the words
"according to the tenor of his acceptance" be construed as referring to the instrument as it was at the time it
came into the hands of the acceptor for acceptance, for he accepts no other instrument than the one presented
to him — the altered form — and it alone he engages to pay. This conclusion is in harmony with the law of
England and the continental countries. It makes for the usefulness and currency of negotiable paper without
seriously endangering accepted banking practices, for banking institutions can readily protect themselves against
liability on altered instruments either by qualifying their acceptance or certification or by relying on forgery
insurance and specialpaper which will make alterations obvious. All of the arguments advanced against the
conclusion herein announced seem highly technical in the face of the practical facts that the drawee bank has

Page 24 of 343
authenticated an instrument in a certain form, and that commercial policy favors the protection of anyone who, in
due course, changes his position on the faith of that authentication. 19

The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only to the extent of the
bill prior to alteration.20 This view appears to be in consonance with Section 124 of the Negotiable Instruments
Law which statesthat a material alteration avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce payment according to its original tenor. Thus,
when the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty
tocharge its client’s account only for bona fide disbursements he had made. If the drawee did not pay according
to the original tenor of the instrument, as directed by the drawer, then it has no right to claim reimbursement
from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s account which
it was expected to treat with utmost fidelity. 21 The drawee, however, still has recourse to recover its loss. It may
pass the liability back to the collecting bank which is what the drawee bank exactly did in this case. It debited the
account of Equitable-PCI Bank for the altered amount of the checks.

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

A depositary bank is the first bank to take an item even though it is also the payor bank, unless the item is
presented for immediate payment over the counter. 22 It is also the bank to which a check is transferred for
deposit in an account at such bank, evenif the check is physically received and indorsed first by another bank. 23 A
collecting bank is defined as any bank handling an item for collection except the bank on which the check is
drawn.24

When petitioners deposited the check with the Bank, they were designating the latter as the collecting bank. This
is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, the Bank shall credit
the amount in petitioners’ account or infuse value thereon only after the drawee bank shall have paid the amount
of the check or the check has been cleared for deposit. 25

The Bank and Equitable-PCI Bank are both depositary and collecting banks.

A depositary/collecting bank where a check is deposited, and which endorses the check upon presentment with
the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that
the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting." It
has been repeatedly held that in check transactions, the depositary/collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that
the act of presenting the check for payment to the drawee is an assertion that the party making the presentment
has done its duty to ascertain the genuineness of the endorsements. 26 If any of the warranties made by the
depositary/collecting bank turns out to be false, then the drawee bank may recover from it up to the amount of
the check.27

The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose
of determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds
itself out to the public as the expert and the law holds it to a high standard of conduct. 28

As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the materially altered
checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed its account with EquitablePCI
Bank to be debited, it has the option toseek recourse against the latter in another forum.

24-HOUR CLEARING RULE

Petitioners faulted the drawee bank for not following the 24-hour clearing period because it was only in August
2000 that the drawee bank notified Equitable-PCI that there were material alterations in the checks.

Page 25 of 343
We do not subscribe to the position taken by petitioners that the drawee bank was at fault because it did not
follow the 24-hour clearing period which provides that when a drawee bank fails to return a forged or altered
check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability.

Section 21 of the Philippine Clearing House Rules and Regulations provides: Sec. 21. Special Return Items Beyond
The Reglementary Clearing Period.- Items which have been the subject of material alteration or items bearing
forged endorsement when such endorsement is necessary for negotiation shall be returned by direct
presentation or demand to the Presenting Bank and not through the regular clearing house facilities within the
period prescribed by law for the filing of a legal action by the returning bank/branch, institution or entity sending
the same.

Antonio Viray, in his book Handbook on Bank Deposits, elucidated:

It is clear that the so-called "24-hour" rule has been modified. In the case of Hongkong & Shanghai vs. People’s
Bank reiterated in Metropolitan Bank and Trust Co. vs. FNCB, the Supreme Court strictly enforced the 24-hour
rule under which the drawee bank forever loses the right to claim against presenting/collecting bank if the check
is not returned at the next clearing day orwithin 24 hours. Apparently, the commercial banks felt strict
enforcement of the 24-hour rule is too harsh and therefore made representations and obtained modification of
the rule, which modification is now incorporated in the Manual of Regulations. Since the same commercial banks
controlled the Philippine Clearing House Corporation, incorporating the amended rule in the PCHC Rules
naturally followed.

As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused by the drawee
bank in accordance with long standing and accepted banking practices shall be returned through the PCHC/local
clearing office, as the case may be, not later than the next regular clearing (24-hour). The modification, however,
is that items which have been the subject of material alteration or bearing forged endorsement may be returned
even beyond 24 hours so long that the same is returned within the prescriptive period fixed by law. The
consensus among lawyers is that the prescriptiveperiod is ten (10)years because a check or the endorsement
thereon is a written contract. Moreover, the item need not be returned through the clearing house but by direct
presentation to the presenting bank.29

In short, the 24-hour clearing ruledoes not apply to altered checks.

LIABILITY OF PETITIONERS

The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co. 30 is in point. A foreigner purchased
several pieces of jewelry from Gold Palace Jewellery using a United Overseas Bank (Malaysia) issued draft
addressed to the Land Bank of the Philippines (LBP). Gold Palace Jewellery deposited the draft in the company’s
account with Far East Bank. Far East Bank presented the draft for clearing to LBP. The latter cleared the same and
Gold Palace Jewellery’s account was credited with the amount stated in the draft. Consequently, Gold Palace
Jewellery released the pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank that the
amount in the foreign draft had been materially altered from ₱300,000.00 to ₱380,000.00. LBP returnedthe check
to Far East Bank. Far East Bank refunded LBP the ₱380,000.00 paid by LBP. Far East Bank initially debited
₱168,053.36 from Gold Palace Jewellery’s account and demanded the payment of the difference between the
amount in the altered draft and the amount debited from Gold Palace Jewellery.

However, for the reasons already discussed above, our pronouncement in the Far East Bank and Trust
Companycase that "the drawee is liable on its payment of the check according to the tenor of the check at the
time of payment, which was the raised amount" 31 is inapplicable to the factual milieu obtaining herein.

We only adopt said decision in so far as it adjudged liability on the part of the collecting bank, thus:

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East,
should not have debited the money paid by the drawee bank from respondent company's account. When Gold
Palace deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL,
Page 26 of 343
became an agent of the former for the collection of the amount in the draft. The subsequent payment by the
drawee bank and the collection of the amount by the collecting bank closed the transaction insofar as the drawee
and the holder of the check or his agent are concerned, converted the check into a mere voucher, and, as already
discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction is a matter
of course; otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a bank at some
future time will call on the payee for the return of the money paid to him on the check.

As the transaction in this case had been closed and the principalagent relationship between the payee and the
collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on
its own and should now be responsible for its own actions. x x x Likewise, Far East cannot invoke the warranty of
the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is
precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a
restrictive indorsement. It did not in any way transfer the title of the instrument to the collecting bank. Far East
did not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due
course, these warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far
East. Without any legal right to do so, the collecting bank, therefore, could not debit respondent's account for the
amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not debit
the account of Gold Palace, and for doing so, it must return what it had erroneously taken. 32

Applying the foregoing ratiocination, the Bank cannot debit the savings account of petitioners. A
depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer, the payee, or
either the drawee bank or depositary bank was negligent and such negligence substantially contributed tothe
loss from alteration. In the instant case, no negligence can be attributed to petitioners. We lend credence to their
claim that at the time of the sales transaction, the Bank’s branch manager was present and even offered the
Bank’s services for the processing and eventual crediting of the checks. True to the branch manager’s words, the
checks were cleared three days later when deposited by petitioners and the entire amount ofthe checks was
credited to their savings account.

ON LEGAL COMPENSATION

Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should have made a
claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank and the collecting bank
in this case and not from them.

The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners’ savings account. Under Art.
1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. And the requisites for legal compensation are:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
Page 27 of 343
It is well-settled that the relationship of the depositors and the Bank or similar institution is that of creditor-
debtor. Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple loans. The bank is the debtorand
the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on
demand. The savings deposit agreement between the bank and the depositor is the contract that determines the
rights and obligations of the parties. 33

But as previously discussed, petitioners are not liable for the deposit of the altered checks. The Bank, asthe
depositary and collecting bank ultimately bears the loss. Thus, there being no indebtedness to the Bank on the
part of petitioners, legal compensation cannot take place. DAMAGES

The Bank incurred a delay in informing petitioners of the checks’ dishonor. The Bank was informed of the
dishonor by Equitable-PCI Bank as early as August 2000 but it was only on 7 March 2001 when the Bank informed
petitioners that it will debit from their account the altered amount. This delay is tantamount to negligence on the
part of the collecting bank which would entitle petitioners to an award for damages under 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 damages in the form of actual or compensatory damages represent the amount debited by the Bank from
petitioners’ account.

We delete the award of moral damages. Contrary to the lower court’s finding, there was no showing that the
Bank acted fraudulently or in bad faith. It may have been remiss in its duty to diligently protect the account of its
depositors but its honest but mistaken belief that petitioners’ account should be debited is not tantamount to
bad faith. We also delete the award of attorney’s fees for it is not a sound public policy to place a premium on
the right to litigate. No damages can becharged to those who exercise such precious right in good faith, even if
done erroneously.34

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the check prior to
alteration.1âwphi1 Since Philippine Veterans Bank paid the altered amount of the check, it may pass the liability
back as it did, to Equitable-PCI Bank,the collecting bank. The collecting banks, Equitable-PCI Bank and the Bank,
are ultimately liable for the amount of the materially altered check. It cannot further pass the liability back to the
petitioners absent any showing in the negligence on the part of the petitioners which substantially contributed to
the loss from alteration.

Based on the foregoing, we affirm the Pozasdecision only insofar as it ordered respondents to jointly and
severally pay petitioners ₱1,800,000.00, representing the amount withdrawn from the latter’s account. We do not
conform with said ruling regarding the finding of bad faith on the part of respondents, as well as its failure
toobserve the 24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June 2006 and 12 February 2007
respectively of the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and SET ASIDE. The 15 January 2004
Decision of the Regional Trial Court of Calamba City, Branch 92 in Civil Case No. B-5886 rendered by Judge
Antonio S. Pozas is REINSTATEDonly insofar as it ordered respondents to jointly and severally pay petitioners
₱1,800,000.00 representing the amount withdrawn from the latter’s account. The award of moral damages and
attorney’s fees are DELETED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

G.R. No. 180144 September 24, 2014

Page 28 of 343
LEONARDO BOGNOT, Petitioner,
vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J. BERNARDEZ, Respondent.

DECISION

BRION, J.:

Before the Court is the petition for review on certiorari 1 filed by Leonardo Bognot (petitioner) assailing the March
28, 2007 decision2 and the October 15, 2007 resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 66915.

Background Facts

RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its borrowers
within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez (Bernardez).

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively referred to
as the "Bognot siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos (₱500,000.00) from
the respondent, payable on November 30, 1996.4 The loan was evidenced by a promissory note and was secured
by a post dated check5 dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He paid a
renewal fee of ₱54,600.00 for each renewal, issued a new post-dated checkas security, and executed and/or
renewed the promissory note previouslyissued. The respondent on the other hand, cancelled and returned to the
petitioner the post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as principal and
signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again Rolando. As security for the
loan, the petitioner also issued BPI Check No. 0595236, 7 post dated to April 1, 1997.8

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the Official
Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly signed by Bernardez.
The petitioner purportedly paid the renewal fees and issued a post-dated check dated June 30, 1997 as security.
As had been done in the past, the respondent superimposed the date "June 30, 1997" on the upper right portion
of Promissory Note No. 97-035 to make it appear that it would mature on the said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the respondent’s
office and applied for another renewal of the loan. She issued in favor of the respondent Promissory Note No.
97-051, and International Bank Exchange (IBE) Check No. 00012522, dated July 30, 1997, in the amount of
₱54,600.00 as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures and
replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned these documents nor issued
a new post-dated check. Consequently, the respondent sent the petitioner follow-up letters demanding payment
of the loan, plus interest and penalty charges. These demands went unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before the
Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that the loan renewal
payable on June 30, 1997 which the Bognot siblings applied for remained unpaid; that before June30, 1997, Mrs.
Bognot applied for another loan extension and issued IBE Check No. 00012522 as payment for the renewal fee;
that Mrs. Bognot convinced the respondent’s clerk to release to her the promissory note and the other loan
documents; that since Mrs. Bognot never issued any replacement check, no loanextension took place and the
loan, originally payable on June 30, 1997, became due on this date; and despite repeated demands, the Bognot
siblings failed to pay their joint and solidary obligation.
Page 29 of 343
Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.

In his Answer,10 the petitioner claimed that the complaint states no cause of action because the respondent’s
claim had been paid, waived, abandoned or otherwise extinguished. He denied being a party to any loan
application and/or renewal in May 1997. He also denied having issued the BPI check post-dated to June 30, 1997,
as well as the promissory note dated June 30, 1997, claiming that this note had been tampered. He claimed that
the one (1) month loan contracted by Rolando and his wife in November 1996 which was lastly renewed in March
1997 had already been fully paid and extinguished in April 1997.11

Trial on the merits thereafter ensued.

The Regional Trial Court Ruling

In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the Bognot siblings to
pay the amount of the loan, plus interest and penalty charges. It considered the wordings of the promissory note
and found that the loan they contracted was joint and solidary. It also noted that the petitioner signed the
promissory note as a principal (and not merely as a guarantor), while Rolando was the co-maker. It brushed the
petitioner’s defense of full payment aside, ruling that the respondent had successfully proven, by preponderance
of evidence, the nonpayment of the loan. The trial court said:

Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he did not, in
order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot despite the fact that
the latter did not file any responsive pleading.

In fine, defendants are liable solidarily to plaintiff and must pay the loan of ₱500,000.00 plus 5% interest monthly
as well as 10% monthly penalty charges from the filing of the complaint on December 3, 1997 until fully paid. As
plaintiff was constrained to engage the services of counsel in order to protect his right,defendants are directed to
pay the former jointly and severally the amount of ₱50,000.00 as and by way of attorney’s fee.

The petitioner appealed the decision to the Court of Appeals.

The Court of Appeals Ruling

In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s defense of
payment untenable and unsupported by clear and convincing evidence. It observed that the petitioner did not
present any evidence showing that the check dated June 30, 1997 had, in fact, been encashed by the respondent
and the proceeds applied to the loan, or any official receipt evidencing the payment of the loan. It further stated
that the only document relied uponby the petitioner to substantiate his defense was the April 1, 1997 checkhe
issued which was cancelled and returned to him by the respondent.

The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated checks
previously issued, as well as the subsequent loan renewals applied for by the petitioner, as manifested by the
official receipts under his name. The CA thus ruled that the petitioner failed to discharge the burden of proving
payment.

The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its resolution of
October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the Rules of Court.

The Petition

The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife. Heclaimed that
based on the legal presumption provided by Article 1271 of the Civil Code,13 his obligation had been discharged
by virtue of his possession of the post-dated check (stamped "CANCELLED") that evidenced his indebtedness. He
argued that it was Mrs. Bognot who subsequently assumed the obligation by renewing the loan, paying the fees

Page 30 of 343
and charges, and issuing a check. Thus, there is an entirely new obligation whose payment is her sole
responsibility.

The petitioner also argued that as a result of the alteration of the promissory note without his consent (e.g., the
superimposition of the date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it
appear that it would mature on this date), the respondent can no longer collect on the tampered note, let alone,
hold him solidarily liable with Rolando for the payment of the loan. He maintained that even without the proof of
payment, the material alteration of the promissory note is sufficient to extinguish his liability.

Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot renewed the
loan and assumed the indebtedness.

The Case for the Respondents

The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced evidence
and of the factual lower courts’ findings that, as a rule, are notreviewable by this Court.

The Issues

The case presents to us the following issues:

1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with Rolando;

2. Whether the petitioner is relieved from liability by reason of the material alteration in the promissory
note; and

3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by substitution of
debtors.

Our Ruling

We find the petition partly meritorious.

As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of
law.14 Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts.15

A question of law exists when the doubt or dispute relates to the application of the law on given facts. On the
other hand, a question of fact exists when the doubt or dispute relates to the truth or falsity of the parties’ factual
allegations.16

As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are not proper for the
petition he filed. In the absence of compelling reasons, the Court cannot re-examine, review or re-evaluate the
evidence and the lower courts’ factual conclusions. This is especially true when the CA affirmed the lower court’s
findings, as in this case. Since the CA’s findings of facts affirmed those of the trial court, they are binding on this
Court, rendering any further factual review unnecessary.

If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits and
demerits.

No Evidence Was Presented to Establish the Fact of Payment

Jurisprudence tells us that one who pleads payment has the burden of proving it; 17 the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment.18 Indeed, once the existence of

Page 31 of 343
an indebtedness is duly established by evidence, the burden of showing with legal certainty that the obligation
has been discharged by payment rests on the debtor. 19

In the present case, the petitioner failed to satisfactorily prove that his obligation had already been extinguished
by payment. As the CA correctly noted, the petitioner failed to present any evidence that the respondent had in
fact encashed his check and applied the proceeds to the payment of the loan. Neither did he present official
receipts evidencing payment, nor any proof that the check had been dishonored.

We note that the petitioner merely relied on the respondent’s cancellation and return to him of the check dated
April 1, 1997. The evidence shows that this check was issued to secure the indebtedness. The acts imputed on the
respondent, standing alone, do not constitute sufficient evidence of payment.

Article 1249, paragraph 2 of the Civil Code provides:

xxxx

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
have been impaired. (Emphasis supplied)

Also, we held in Bank of the Philippine Islands v. Spouses Royeca: 20

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot
constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does
not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until
the payment by commercial document is actually realized.(Emphasis supplied)

Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in cases where
a private document evidencing a credit was voluntarily returned by the creditor to the debtor), this presumption
is merely prima facieand is not conclusive; the presumption loses efficacy when faced with evidence to the
contrary.

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of the credit
where more convincing evidence would be required than what normally would be called for to prove
payment.21Thus, reliance by the petitioner on the legal presumption to prove payment is misplaced.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check dated April
1, 1997, simply established his renewal of the loan – not the fact of payment. Furthermore, it has been established
during trial, through repeated acts, that the respondent cancelled and surrendered the post-dated check
previously issued whenever the loan is renewed. We trace whatwould amount to a practice under the facts of this
case, to the following testimonial exchanges:

Civil Case No. 97-0572

TSN December 14, 1998, Page 13.

Atty. Almeda:

Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which he or
she must pay before a renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3, 1997,
would this be your official receipt which you issued to your client which they make renewal of the loan?

A: Yes, sir.

Page 32 of 343
xxx xxx xxx

Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has already been
cancelled, is that correct?

A: Yes, sir.

Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan which have
been the subject of the renewal are deemed cancelled and replaced is that correct?

A: Yes, sir. xxx22

Civil Case No. 97-0572

TSN November 27, 1998, Page 27.

Q: What happened to the check that Mr. Bognot issued?

Court: There are two Bognots. Who in particular?

Q: Leonardo Bognot, Your Honor.

A: Every month, they were renewed, he issued a new check, sir.

Q: Do you have a copy of the checks?

A: We returned the check upon renewing the loan. 23

In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving payment.

The Alteration of the Promissory Note

Did Not Relieve the Petitioner From Liability

We now come to the issue of material alteration. The petitioner raised as defense the alleged material alteration
of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged that the respondent’s
superimposition of the due date "June 30, 1997" on the promissory note without his consent effectively relieved
him of liability.

We find this defense untenable.

Although the respondent did not dispute the fact of alteration, he nevertheless denied that the alteration was
done without the petitioner’s consent. The parties’ Pre-Trial Order dated November 3, 199824 states that:

xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and denials were
made, to wit:

FOR DEFENDANT LEONARDO BOGNOT

13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally dated April
1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the plaintiff admitted the
superimposition.

Page 33 of 343
14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo Bognot
which was denied by plaintiff." 25 (Emphasis supplied)

Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to rubber
stamp, or make a superimposition through a rubber stamp, the old promissory note which has been renewed to
make it appear that there is a new loan obligation. The petitioner did not rebut this statement. To our mind, the
failure to rebut is tantamount to an admission of the respondent’s allegations:

"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber stamp on
old promissory note which has been renewed to make it appear that there is a new loan obligation to which the
plaintiff admitted." (Emphasis Supplied).26

Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter cannot totally
avoid payment of his obligation to the respondent based on the contract of loan.

Based on the records, the Bognot Siblings had applied for and were granted a loan of ₱500,000.00 by the
respondent. The loan was evidenced by a promissory note and secured by a post-dated check27 dated November
30, 1996. In fact, the petitioner himself admitted his loan application was evidenced by the Promissory Note dated
April 1, 1997.28 This loan was renewed several times by the petitioner, after paying the renewal fees, as shown by
the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3, 1997, respectively. These official receipts were
issued in the name of the petitioner. Although the petitioner had insisted that the loan had been extinguished, no
other evidence was presented to prove payment other than the cancelled and returnedpost-dated check.

Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the respondent
solely on the ground that the Promissory Note in question was tampered. Notably, the existence of the
obligation, as well as its subsequent renewals, have been duly established by: first, the petitioner’s application for
the loan; second, his admission that the loan had been obtained from the respondent; third, the post-dated
checks issued by the petitioner to secure the loan; fourth, the testimony of Mr. Bernardez on the grant, renewal
and non-payment of the loan; fifth, proof of non-payment of the loan; sixth, the loan renewals; and seventh, the
approval and receipt of the loan renewals.

In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of an
indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other documentary
evidence such as a written memorandum signed by the parties. In Pacheco v. Court of Appeals, 32 this Court
likewise expressly recognized that a check constitutes anevidence of indebtedness and is a veritable proof of an
obligation. It canbe used in lieu of and for the same purpose as a promissory note and can therefore be
presented to establish the existence of indebtedness.33

In the present petition, we find that the totality of the evidence on record sufficiently established the existence of
the petitioner’s indebtedness (and liability) based on the contract ofloan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan.

The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained

It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had been
extinguished by novation. The petitioner never raised this issue before the lower courts.

It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before the lower
tribunal for its consideration.34 Matters neither alleged in the pleadingsnor raised during the proceedings below
cannot be ventilated for the first time on appeal before the Supreme Court. 35

In any event, we find no merit in the defense of novation as we discuss at length below. Novation cannot be
presumed and must be clearly and unequivocably proven.

Page 34 of 343
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting
a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 36

Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, may be made
even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him rights mentioned in Articles 1236 and 1237."

To give novation legal effect, the original debtor must be expressly released from the obligation, and the new
debtor must assume the original debtor’s place in the contractual relationship. Depending on who took the
initiative, novation by substitution of debtor has two forms – substitution by expromision and substitution by
delegacion. The difference between these two was explained in Garcia v. Llamas: 37

"In expromision, the initiative for the change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these
three persons are necessary."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid
novation.38Furthermore, novation by substitution of debtor must alwaysbe made with the consent of the
creditor.39

The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot renewed
the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying the renewal fees
and charges, and by executing a new promissory note. He further claimed that she issued her own check 40 to
cover the renewal fees, which fact, according to the petitioner, was done with the respondent’s consent.

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She merely
attempted to renew the original loan by executing a new promissory note 41 and check. The purported one month
renewal of the loan, however, did not push through, as Mrs. Bognot did not return the documents or issue a new
post dated check. Since the loan was not renewed for another month, the originaldue date, June 30,1997,
continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That the respondent
initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and the petitioner’s
previous check dated June 30, 1997, does not ipso factoresult in novation. Neither will this acquiescence
constitute an implied acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor. Novation
must be clearly and unequivocally shown, and cannot be presumed.

Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation took place
with the effect of releasing the petitioner from his obligation to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the petitioner,
the respondent can still enforce the payment of the obligation against the original debtor. Mere acquiescence to
the renewal of the loan, when there is clearly no agreement to release the petitioner from his responsibility, does
not constitute novation.

The Nature of the Petitioner’s Liability

On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner solidarily
liable with Rolando.
Page 35 of 343
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. 42 There is
solidary liability when the obligation expressly so states, when the law so provides, or when the nature of the
obligation so requires.43 Thus, when the obligor undertakes to be "jointly and severally" liable, the obligation is
solidary,

In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on Promissory
Note No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings defined the parameters of
their obligation as follows:

"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES INVESTORS RRI
LENDING CORPO. or Order, its office at Paranaque, M.M. the principal sum of Five Hundred Thousand PESOS
(₱500,000.00), PhilippineCurrency, with interest thereon at the rate of Five percent (5%) per month/annum,
payable in One Installment (01) equal daily/weekly/semi-monthly/monthly of PESOS Five Hundred Thousand
Pesos (₱500,000.00), first installment to become due on June 30, 1997. xxx" 44 (Emphasis Ours).

Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for the
solidary liability of the parties, we note and stress that the promissory note is merely a photocopyof the original,
which was never produced.

Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence isadmissible
other than the original document itself except in the instances mentioned in Section 3, Rule 130 of the Revised
Rules of Court.45

The records show that the respondenthad the custody of the original promissory note dated April 1, 1997, with a
superimposed rubber stamp mark "June 30, 1997", and that it had been given every opportunity to present it. The
respondent even admitted during pre-trial that it could not present the original promissory note because it is in
the custody of its cashier who is stranded in Bicol. 46 Since the respondent never produced the original of the
promissory note, much less offered to produce it, the photocopy of the promissory note cannot be admitted as
evidence. Other than the promissory note in question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower courts completely relied on the note when
they found the Bognot siblingssolidarily liable.

The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and clearly
expressed and cannot be presumed.47

In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the petitioner
had bound himself solidarily with Rolando for the payment of the loan, we cannot but conclude that the
obligation to pay is only joint.48

The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the respondentfor the
unpaid loan, we find the imposition of the 5% monthly interest to be excessive, iniquitous, unconscionable and
exorbitant, and hence, contrary to morals and jurisprudence. Although parties to a loan agreement have wide
latitude to stipulate on the applicable interest rate under Central Bank Circular No. 905 s. 1982 (which suspended
the Usury Law ceiling on interest effective January 1, 1983), we stress that unconscionable interest rates may still
be declared illegal.49

In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests are contrary to
morals and are illegal. In Medel v. Court of Appeals, 50 we annulled a stipulated 5.5% per month or 66% per
annum interest on a ₱500,000.00 loan, and a 6% per month or 72% per annum interest on a ₱60,000.00 loan,
respectively, for being excessive, iniquitous, unconscionableand exorbitant.1âwphi1

Page 36 of 343
We reiterated this ruling in Chua v. Timan, 51 where we held that the stipulated interest rates of 3% per month and
higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be reduced to 12% per
annum.

Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month, (or 60%
per annum) in the promissory note is excessive, unconscionable, contrary to morals and is thus illegal. It is void ab
initiofor violating Article 130652 of the Civil Code.1âwphi1 We accordingly find it equitable to reduce the interest
rate from 5% per month to 1% per month or 12% per annum in line with the prevailing jurisprudence.

WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in CA-G.R. CV No.
66915 is hereby AFFIRMED with MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY LIABLE to pay the
sum of ₱500,000.00 plus 12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.

Costs against petitioner Leonardo A. Bognot.

SO ORDERED.

ARTURO D. BRION
Associate Justice

G.R. No. 184458 January 14, 2015

RODRIGO RIVERA, Petitioner,

vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.

x-----------------------x

G.R. No. 184472

SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners,

vs.
RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate rulings
of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the
Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for collection of a sum of money due
a promissory note. While all three (3) lower courts upheld the validity and authenticity of the promissory note as
duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified the
trial courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent
(12%) per annumcomputed from the date of judicial or extrajudicial demand, and (2) reinstatement of the award
of attorney’s fees also in a reduced amount of ₱50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions the
entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta

Page 37 of 343
Chua (Spouses Chua), take exception to the appellate court’s reduction of the stipulated interest rate of sixty
percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador are
kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA,
the sum of One Hundred Twenty Thousand Philippine Currency (₱120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred Twenty
Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest
monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty
percent (20%) of the total amount due and payable as and for attorney’s fees which in no case shall be less than
₱5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of
Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial
payment for the loan, issued and delivered to the SpousesChua, as payee, a check numbered 012467, dated 30
December 1998, drawn against Rivera’s current account with the Philippine Commercial International Bank (PCIB)
in the amount of ₱25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn
against Rivera’s PCIB current account, numbered 013224, duly signed and dated, but blank as to payee and
amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in the amount of
₱133,454.00 with "cash" as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the
principal amount of ₱120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason "account closed."

As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00 covering the principal of
₱120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of
Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The case was
raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory
Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were always covered by a

Page 38 of 343
security; (3) at the time of the filing of the complaint, he still had an existing indebtedness to the Spouses Chua,
secured by a real estate mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he
delivered to the Spouses Chua on 21 December 1998, should have been issued in the amount of only 1,300.00,
representing the amount he received from the Spouses Chua’s saleslady; (5) contrary to the supposed
agreement, the Spouses Chua presented the check for payment in the amount of ₱133,454.00; and (6) there was
no demand for payment of the amount of ₱120,000.00 prior to the encashment of PCIB Check No. 0132224. 5

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses:

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the testimonies
of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989);
NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate of 18th Basic
Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended a seminar on US
Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar on Effective
Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar lecturer on
Questioned Documents, Signature Verification and/or Detection; had examined more than a hundred thousand
questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the
Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on
several documents. After a thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded
that the questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera]
appearing on the other documents submitted were written by one and the same person. In connection with his
findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the
following conclusion: "The questioned and the standard specimen signatures RODGRIGO RIVERA were written by
one and the same person."

[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he obtained a loan from
[respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of [respondent
Salvador] as collateral; aside from this loan, in October, 1998 he borrowed ₱25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the Promissory Note dated 24
February 1995 and alleged that the signature appearing thereon was not his signature; [respondent Salvador’s]
claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not true, the truth being
that he delivered the check to [respondent Salvador] with the space for amount left blank as he and [respondent]
Salvador had agreed that the latter was to fill it in with the amount of ₱1,300.00 which amount he owed [the
spouses Chua]; however, on 29 December 1998 [respondent] Salvador called him and told him that he had
written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner
Magbojos, [Rivera] reiterated his averment that the signature appearing on the Promissory Note was not his
signature and that he did not execute the Promissory Note. 6

After trial, the MeTC ruled in favor of the Spouses Chua:

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus stipulated interest at the rate of 5%
per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from 11 June 1999, as
actual and compensatory damages; 20% of the whole amount due as attorney’s fees. 7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the award
of attorney’s fees to the Spouses Chua:
Page 39 of 343
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated
October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera. Undaunted,
Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the Promissory Note, reduced the
imposition of interest on the loan from 60% to 12% per annum, and reinstated the award of attorney’s fees in
favor of the Spouses Chua:

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest
rate of 60% per annum is hereby reduced to12% per annum and the award of attorney’s fees is reinstated atthe
reduced amount of ₱50,000.00 Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the Spouses Chua in
G.R. No. 184472, respectively raising the following issues:

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE

RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED
BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE
NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING

ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW
AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION
OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT
MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER
ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID
STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL,
IMMORAL OR VOID.11

As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition, via a Minute
Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court specifically
concerning the correct rate of interest on Rivera’s indebtedness under the Promissory Note. 12

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling of the
Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship withthe
Spouses Chua who were money lenders, he has been able to maintain a loan account with them. However, each
of these loan transactions was respectively "secured by checks or sufficient collateral."

Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof (sic) from
[Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December 31, 1995]." 13

Page 40 of 343
On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower courts’
uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only that the
signature is not his and varies from his usual signature. He likewise makes a confusing defense of having
previously obtained loans from the Spouses Chua who were money lenders and who had allowed him a period of
"almost four (4) years" before demanding payment of the loan under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of
Investigation (NBI) handwriting expert on the integrity of the promissory note. On that score, the appellate court
aptly disabled Rivera’s contention:

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery.
The fact of forgery cannot be presumed but must be proved by clear, positive and convincing evidence. Mere
variance of signatures cannot be considered as conclusive proof that the same was forged. Save for the denial of
Rivera that the signature on the note was not his, there is nothing in the records to support his claim of forgery.
And while it is true that resort to experts is not mandatory or indispensable to the examination of alleged forged
documents, the opinions of handwriting experts are nevertheless helpful in the court’s determination of a
document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the testimony
of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence would lead to the
conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by preponderance
of evidence, which simply means "evidence which is of greater weight, or more convincing than that which is
offered in opposition to it."

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima faciecase
in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of forgery.
Unfortunately for [Rivera], he failed to substantiate his defense. 14 Well-entrenched in jurisprudence is the rule that
factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest
degree of respect and are considered conclusive between the parties. 15 A review of such findings by this Court is
not warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial
court are grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the
appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to
notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific evidence on
which they are based, are premised on the absence of evidence, or are contradicted by evidence on
record.16 None of these exceptions obtains in this instance. There is no reason to depart from the separate factual
findings of the three (3) lower courts on the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer to the plaintiff’s
claim or cause of action, upon which issue is joined, whether they relate to the whole case or only to certain
issues in the case.17

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting
expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to the examination
or the comparison of handwriting, the trial courts in this case, on its own, using the handwriting expert testimony
only as an aid, found the disputed document valid. 18

Hence, the MeTC ruled that:

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[Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent]
Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI
Senior Documents Examiner that the questioned signature (appearing on the Promissory Note) and standard
specimen signatures "Rodrigo Rivera" "were written by one and the same person"; actual view at the hearing of
the enlarged photographs of the questioned signature and the standard specimen signatures. 19

Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a money lender to
extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already in default and has
not been paying any interest for a loan incurred in February 1995." 20

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as "kumpadres," Rivera was
allowed another loan, albeit this time secured by a real estate mortgage, which will cover Rivera’s loan should
Rivera fail to pay. There is nothing inconsistent with the Spouses Chua’s two (2) and successive loan
accommodations to Rivera: one, secured by a real estate mortgage and the other, secured by only a Promissory
Note.

Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a substantial
amount of time before the Spouses Chua demanded payment of the obligation due under the Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant defense to
assail the authenticity and validity of the Promissory Note. Although the burden of proof rested on the Spouses
Chua having instituted the civil case and after they established a prima facie case against Rivera, the burden of
evidence shifted to the latter to establish his defense. 21 Consequently, Rivera failed to discharge the burden of
evidence, refute the existence of the Promissory Note duly signed by him and subsequently, that he did not fail to
pay his obligation thereunder. On the whole, there was no question left on where the respective evidence of the
parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even assuming the
validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera
argues that it was grave error on the part of the appellate court to apply Section 70 of the Negotiable
Instruments Law (NIL).22

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not
apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a negotiable
instrument:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION 184. Promissory
Note, Defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise in
writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s
own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua, and not
to order or to bearer, or to the order of the Spouses Chua as payees. However, even if Rivera’s Promissory Note is
Page 42 of 343
not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which provides that
presentment for payment is not necessary to charge the person liable on the instrument, Rivera is still liable
under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31
December 1995. As of 1 January 1996, Rivera had already incurred in delay when he failed to pay the amount of
₱120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation,
delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an
express stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling motive or
the principal inducement for the creation of the obligation; and (4) where demand would be useless. In the first
two paragraphs, it is not sufficient that the law or obligation fixes a date for performance; it must further state
expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of interest:

It is agreed and understood that failure on my part to pay the amount of (₱120,000.00) One Hundred Twenty
Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest
monthly from the date of default until the entire obligation is fully paid for. 23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of default" until the
entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a date certain,
31 December 1995, will give rise to the obligation to pay interest. The Promissory Note expressly provided that
after 31 December 1995, default commences and the stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due
date of the obligation. On that date, Rivera became liable for the stipulated interest which the Promissory Note
says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not necessary before Rivera could
be held liable for the principal amount of ₱120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became
liable to pay the Spouses Chua damages, in the form of stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of
their obligations is laid down on Article 1170 24 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for damages
when the obligor incurs in delay:
Page 43 of 343
Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six percent per annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the
debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the Promissory
Note provides for an indemnity for damages upon default of Rivera which is the payment of a 5%monthly
interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as
obligor, assumed to pay additional 5% monthly interest on the principal amount of ₱120,000.00 upon default.

Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there isno stipulation to the contrary. Nevertheless, damages
shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment and
reparation. It is an exception to the general rules on recovery of losses and damages. As an exception to the
general rule, a penal clause must be specifically set forth in the obligation. 25

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal clause,
and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted in the payment
of the amount of ₱120,000.00. The measure of damages for the Rivera’s delay is limited to the interest stipulated
in the Promissory Note. In apt instances, in default of stipulation, the interest is that provided by law. 26

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or
60% per annum. On this score, the appellate court ruled:

It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe 31
December 1995. Given this circumstance, demand by the creditor isno longer necessary in order that delay may
exist since the contract itself already expressly so declares. The mere failure of [Spouses Chua] to immediately
demand or collect payment of the value of the note does not exonerate [Rivera] from his liability therefrom.
Verily, the trial court committed no reversible error when it imposed interest from 1 January 1996 on the
ratiocination that [Spouses Chua] were relieved from making demand under Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests
and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are illegal if they are
unconscionable and the Court is allowed to temper interest rates when necessary. Since the interest rate agreed
upon is void, the parties are considered to have no stipulation regarding the interest rate, thus, the rate of
interest should be 12% per annum computed from the date of judicial or extrajudicial demand. 27

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and
attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable. Significantly, the issue on
payment of interest has been squarely disposed of in G.R. No. 184472 denying the petition of the Spouses Chua
for failure to sufficiently showany reversible error in the ruling of the appellate court, specifically the reduction of
the interest rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately, the denial of the
petition in G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether the Court of
Appeals correctly reduced the interest rate stipulated in the Promissory Note.

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Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1) the former
judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision must have
been rendered by a court having jurisdiction over the subject matter and the parties; and (4) there must be,
between the first and the second action, identity of parties, of subject matter and of causes of action. 28

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising
specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on the
propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling
thereon affirming the Court of Appeals is a "bar by prior judgment."

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then
prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving
the loan or for bearance of money.29 Thus, the legal interest accruing from the Promissory Note is 12% per
annum from the date of default on 1 January 1996. However, the 12% per annumrate of legal interest is only
applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No.
799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery
Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal
interest from 1 January 1996, the date when Rivera defaulted, to date when this Decision becomes final and
executor is divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996
to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and
executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this
Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per annum from 11 June
1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this
Decision becomes final and executor.31 We base this imposition of interest on interest due earning legal interest
on Article 2212 of the Civil Code which provides that "interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent on this point."

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could
already be determined with reasonable certainty given the wording of the Promissory Note. 32

We cite our recent ruling in Nacar v. Gallery Frames: 33

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or for bearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extra judicial demand under and subject to the
provisions ofArticle 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum.1âwphi1 No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when
such certainty cannot be so reasonably established at the time the demand is made, the interest
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 shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a for bearance of credit. And, in addition to the above, judgments that
have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest fixed therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, weagree
with the reduction thereof but not the ratiocination of the appellate court that the attorney’s fees are in the
nature of liquidated damages or penalty. The interest imposed in the Promissory Note already answers as
liquidated damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit in a reduced
amount, in recognition that the Spouses Chua were compelled to litigate and incurred expenses to protect their
interests.34 Thus, the award of ₱50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the Spouses
Chua:

Face value of the Stipulated Interest A & B Interest due earning legal Attorney’s fees Total
Promissory Note interest A & B Amount

February 24, 1995 to A. January 1, 1996 to
December 31, 1995 June 30, 2013
B. July 1 2013 to date
when this Decision
becomes final and
executory
A. June 11, 1999 (date of Wholesale
judicial demand) to June Amount
30, 2013
B. July 1, 2013 to date
when this Decision
becomes final and
executory

₱120,000.00 A. 12 % per annumon the
principal amount of
₱120,000.00
B. 6% per annumon the
principal amount of
₱120,000.00
A. 12% per annumon the ₱50,000.00 Total amount
total amount of column 2 of Columns 1-4
B. 6% per annumon the
total amount of column
235

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the rate
of 6% per annum computed from its finality until full payment thereof, the interim period being deemed to be a
forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No.
90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and Violeta Chua
the following:

(1) the principal amount of ₱120,000.00;

(2) legal interest of 12% per annumof the principal amount of ₱120,000.00 reckoned from 1 January 1996
until 30 June 2013;

(3) legal interest of 6% per annumof the principal amount of ₱120,000.00 form 1 July 2013 to date when
this Decision becomes final and executory;

Page 46 of 343
 (4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand,
to 30 June 2013, as interest due earning legal interest;

(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this
Decision becomes final and executor, asinterest due earning legal interest;

(6) Attorney’s fees in the amount of ₱50,000.00; and

(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full
payment thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

G.R. No. 185964 June 16, 2014

ASIAN TERMINALS, INC., Petitioner,

vs.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION, Respondent.

DECISION

REYES, J.:

This is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court seeking to annul and set aside the
Decision2 dated October 10, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99021 which adjudged
petitioner Asian Terminals, Inc. (ATI) liable to pay the money claims of respondent First Lepanto-Taisho Insurance
Corporation (FIRST LEPANTO).

The Undisputed Facts

On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags complete and in
good condition were loaded and received on board M/V "Da Feng" owned by China Ocean Shipping Co.
(COSCO) in favor of consignee, Grand Asian Sales, Inc. (GASI). Based on a Certificate of Insurance 4 dated August
24, 1995, it appears that the shipment was insured against all risks by GASI with FIRST LEPANTO for ₱7,959,550.50
under Marine Open Policy No. 0123.

The shipment arrived in Manila on July 18, 1996 and was discharged into the possession and custody of ATI, a
domestic corporation engaged in arrastre business. The shipment remained for quite some time at ATI’s storage
area until it was withdrawn by broker, Proven Customs Brokerage Corporation (PROVEN), on August 8 and 9,
1996 for delivery to the consignee. Upon receipt of the shipment, 5 GASI subjected the same to inspection and
found that the delivered goods incurred shortages of 8,600 kilograms and spillage of 3,315 kg for a total of11,915
kg of loss/damage valued at ₱166,772.41.

GASI sought recompense from COSCO, thru its Philippine agent Smith Bell Shipping Lines, Inc. (SMITH
BELL),6ATI7 and PROVEN8 but was denied. Hence, it pursued indemnification from the shipment’s insurer. 9

After the requisite investigation and adjustment, FIRST LEPANTO paid GASI the amount of ₱165,772.40 as
insurance indemnity.10

Page 47 of 343
Thereafter, GASI executed a Release of Claim 11 discharging FIRST LEPANTO from any and all liabilities pertaining
to the lost/damaged shipment and subrogating it to all the rights of recovery and claims the former may have
against any person or corporation in relation to the lost/damaged shipment.

As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping agency in the Philippines, SMITH BELL,
PROVEN and ATI, reimbursement of the amount it paid to GASI. When FIRST LEPANTO’s demands were not
heeded, it filed on May 29, 1997 a Complaint12 for sum of money before the Metropolitan Trial Court (MeTC) of
Manila, Branch 3. FIRST LEPANTO sought that it be reimbursed the amount of 166,772.41, twenty-five percent
(25%) thereof as attorney’s fees, and costs of suit.

ATI denied liability for the lost/damaged shipment and claimed that it exercised due diligence and care in
handling the same.13 ATI averred that upon arrival of the shipment, SMITH BELL requested for its inspection 14 and
it was discovered that one jumbo bag thereof sustained loss/damage while in the custody of COSCO as
evidenced by Turn Over Survey of Bad Order Cargo No. 47890 dated August 6, 1996 15 jointly executed by the
respective representatives of ATI and COSCO. During the withdrawal of the shipment by PROVEN from ATI’s
warehouse, the entire shipment was re-examined and it was found to be exactly in the same condition as when it
was turned over to ATI such that one jumbo bag was damaged. To bolster this claim, ATI submitted Request for
Bad Order Survey No. 40622 dated August 9, 1996 16 jointly executed by the respective representatives of ATI and
PROVEN. ATI also submitted various Cargo Gate Passes 17 showing that PROVEN was able to completely withdraw
all the shipment from ATI’s warehouse in good order condition except for that one damaged jumbo bag.

In the alternative, ATI asserted that even if it is found liable for the lost/damaged portion of the shipment, its
contract for cargo handling services limits its liability to not more than ₱5,000.00 per package. ATI interposed a
counterclaim of ₱20,000.00 against FIRST LEPANTO as and for attorney’s fees. It also filed a cross-claim against
its co-defendants COSCO and SMITH BELL in the event that it is made liable to FIRST LEPANTO. 18

PROVEN denied any liability for the lost/damaged shipment and averred that the complaint alleged no specific
acts or omissions that makes it liable for damages. PROVEN claimed that the damages in the shipment were
sustained before they were withdrawn from ATI’s custody under which the shipment was left in an open area
exposed to the elements, thieves and vandals. PROVEN contended that it exercised due diligence and prudence
in handling the shipment. PROVEN also filed a counterclaim for attorney’s fees and damages. 19

Despite receipt of summons on December 4, 1996, 20 COSCO and SMITH BELL failed to file an answer to the
complaint. FIRST LEPANTO thus moved that they be declared in default21 but the motion was denied by the
MeTC on the ground that under Rule 9, Section 3 of the Rules of Civil Procedure, "when a pleading asserting a
claim states a common cause of action against several defending parties, some of whom answer and the other
fail to do so, the Court shall try the case against all upon the answers thus filed, and render judgment upon the
evidence presented."22

Ruling of the MeTC

In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and PROVEN from any liability and instead found
COSCO to be the party at fault and hence liable for the loss/damage sustained by the subject shipment. However,
the MeTC ruled it has no jurisdiction over COSCO because it is a foreign corporation. Also, it cannot enforce
judgment upon SMITH BELL because no evidence was presented establishing that it is indeed the Philippine
agent of COSCO. There is also no evidence attributing any fault to SMITH BELL. Consequently, the complaint was
dismissed in this wise:

WHEREFORE, in light of the foregoing, judgment is hereby rendered DISMISSING the instant case for failure of
[FIRST LEPANTO] to sufficiently establish its cause o faction against [ATI, COSCO, SMITH BELL, and PROVEN].

The counterclaims of [ATI and PROVEN] are likewise dismissed for lack of legal basis.

No pronouncement as to cost.

Page 48 of 343
SO ORDERED.24

Ruling of the Regional Trial Court

On appeal, the Regional Trial Court (RTC) reversed the MeTC’s findings. In its Decision 25 dated January 26, 2007,
the RTC of Manila, Branch 21, in Civil Case No. 06-116237, rejected the contentions of ATI upon its observation
that the same is belied by its very own documentary evidence. The RTC remarked that, if, as alleged by ATI, one
jumbo bag was already in bad order condition upon its receipt of the shipment from COSCO on July 18, 1996,
then how come that the Request for Bad Order Survey and the Turn Over Survey of Bad Order Cargo were
prepared only weeks thereafter or on August 9, 1996 and August 6, 1996, respectively. ATI was adjudged unable
to prove that it exercised due diligence while in custody of the shipment and hence, negligent and should be held
liable for the damages caused to GASI which, in turn, is subrogated by FIRST LEPANTO.

The RTC rejected ATI’s contention that its liability is limited only to ₱5,000.00 per package because its
Management Contract with the Philippine Ports Authority (PPA) purportedly containing the same was not
presented as evidence. More importantly, FIRST LEPANTO or GASI cannot be deemed bound thereby because
they were not parties thereto. Lastly, the RTC did not give merit to ATI’s defense that any claim against it has
already prescribed because GASI failed to file any claim within the 15-day period stated in the gate pass issued by
ATI to GASI’s broker, PROVEN. Accordingly, the RTC disposed thus:

WHEREFORE, in light of the foregoing, the judgment on appeal is hereby REVERSED.

[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of [P]165,772.40 with legal interest until fully
paid, to pay [FIRST LEPANTO] 10% of the amount due the latter as and for attorney’s fees plus the costs of suit.

The complaint against [COSCO/SMITH BELL and PROVEN] are DISMISSED for lack of evidence against them. The
counterclaim and cross[-]claim of [ATI] are likewise DISMISSED for lack of merit.

SO ORDERED.26

Ruling of the CA

ATI sought recourse with the CA challenging the RTC’s finding that FIRST LEPANTO was validly subrogated to the
rights of GASI with respect to the lost/damaged shipment. ATI argued that there was no valid subrogation
because FIRSTLEPANTO failed to present a valid, existing and enforceable Marine Open Policy or insurance
contract. ATI reasoned that the Certificate of Insurance or Marine Cover Note submitted by FIRST LEPANTO as
evidence is not the same as an actual insurance contract.

In its Decision27 dated October 10, 2008, the CA dismissed the appeal and held that the Release of Claim and the
Certificate of Insurance presented by FIRST LEPANTO sufficiently established its relationship with the consignee
and that upon proof of payment of the latter’s claim for damages, FIRST LEPANTO was subrogated to its rights
against those liable for the lost/damaged shipment.

The CA also affirmed the ruling of the RTC that the subject shipment was damaged while in the custody of ATI.
Thus, the CA disposed as follows:

WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED and the instant petition is DENIED
for lack of merit.

SO ORDERED.28

ATI moved for reconsideration but the motion was denied in the CA Resolution29 dated January 12, 2009. Hence,
this petition arguing that:

Page 49 of 343
(a) The presentation of the insurance policy is indispensable in proving the right of FIRST LEPANTO to be
subrogated to the right of the consignee pursuant to the ruling in Wallem Philippines Shipping, Inc. v. Prudential
Guarantee and Assurance Inc.;30

(b) ATI cannot be barred from invoking the defense of prescription as provided for in the gate passes in
consonance with the ruling in International Container Terminal Services, Inc. v. Prudential Guarantee and
Assurance Co, Inc.31

Ruling of the Court

The Court denies the petition.

ATI failed to prove that it exercised

due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.

It must be emphasized that factual questions pertaining to ATI’s liability for the loss/damage sustained by GASI
has already been settled in the uniform factual findings of the RTC and the CA that: ATI failed to prove by
preponderance of evidence that it exercised due diligence in handling the shipment.

Such findings are binding and conclusive upon this Court since a review thereof is proscribed by the nature of the
present petition. Only questions of law are allowed in petitions for review on certiorari under Rule 45 of the Rules
of Court. It is not the Court’s duty to review, examine, and evaluate or weigh all over again the probative value of
the evidence presented, especially where the findings of the RTC are affirmed by the CA, as in this case.32

There are only specific instances when the Court deviates from the rule and conducts a review of the courts a
quo’s factual findings, such as when: (1) the inference made is manifestly mistaken, absurd or impossible; (2) there
is grave abuse of discretion;(3) the findings are grounded entirely on speculations, surmises or conjectures; (4) the
judgment of the CA is based on misapprehension of facts; (5) the CA, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both appellant and appellee; (6) the findings of
fact are conclusions without citation of specific evidence on which they are based; (7) the CA manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion; and (8) the findings of fact of the CA are premised on the absence of evidence and are
contradicted by the evidence on record.33

None of these instances, however, are present in this case. Moreover, it is unmistakable that ATI has already
conceded to the factual findings of RTC and CA adjudging it liable for the shipment’s loss/damage considering
the absence of arguments pertaining to such issue in the petition at bar.

These notwithstanding, the Court scrutinized the records of the case and found that indeed, ATI is liable as the
arrastre operator for the lost/damaged portion of the shipment.

The relationship between the consignee and the arrastre operator is akin to that existing between the consignee
and/or the owner of the shipped goods and the common carrier, or that between a depositor and a
warehouseman. Hence, in the performance of its obligations, an arrastre operator should observe the same
degree of diligence as that required of a common carrier and a warehouseman. Being the custodian of the goods
discharged from a vessel, an arrastre operator’s duty is to take good care of the goods and to turn them over to
the party entitled to their possession.34

In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance with the
obligation to deliver the goods to the appropriate party devolves upon the arrastre operator. Since the
safekeeping of the goods is its responsibility, it must prove that the losses were not due to its negligence or to

Page 50 of 343
that of its employees. To avoid liability, the arrastre operator must prove that it exercised diligence and due care
in handling the shipment.35

ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on the basis of the
Request for Bad Order Survey dated August 9, 1996 purportedly showing that when ATI received the shipment,
one jumbo bag thereof was already in damaged condition.

The RTC and CA were both correct in concluding that ATI’s contention was improbable and illogical. As
judiciously discerned by the courts a quo, the date of the document was too distant from the date when the
shipment was actually received by ATI from COSCO on July 18, 1996. In fact, what the document established is
that when the loss/damage was discovered, the shipment has been in ATI’s custody for at least two weeks. This
circumstance, coupled with the undisputed declaration of PROVEN’s witnesses that while the shipment was in
ATI’s custody, it was left in an open area exposed to the elements, thieves and vandals, 36 all generate the
conclusion that ATI failed to exercise due care and diligence while the subject shipment was under its custody,
control and possession as arrastre operator.

To prove the exercise of diligence in handling the subject cargoes, an arrastre operator must do more than
merely show the possibility that some other party could be responsible for the loss or the damage. 37 It must
prove that it used all reasonable means to handle and store the shipment with due care and diligence including
safeguarding it from weather elements, thieves or vandals.

Non-presentation of the insurance

contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.

It is conspicuous from the records that ATI put in issue the submission of the insurance contract for the first time
before the CA. Despite opportunity to study FIRST LEPANTO’s complaint before the MeTC, ATI failed to allege in
its answer the necessity of the insurance contract. Neither was the same considered during pre-trial as one of the
decisive matters in the case. Further, ATI never challenged the relevancy or materiality of the Certificate of
Insurance presented by FIRST LEPANTO as evidence during trial as proof of its right to be subrogated in the
consignee’s stead. Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO will have to
prove its subrogation rights by presenting a copy of the insurance contract, ATI is barred from pleading the
absence of such contract in its appeal. It is imperative for the parties to disclose during pre-trial all issues they
intend to raise during the trial because, they are bound by the delimitation of such issues. The determination of
issues during the pre-trial conference bars the consideration of other questions, whether during trial or on
appeal.38

A faithful adherence to the rule by litigants is ensured by the equally settled principle that a party cannot change
his theory on appeal as such act violates the basic rudiments of fair play and due process. As stressed in Jose v.
Alfuerto:39

[A] party cannot change his theory ofthe case or his cause of action on appeal. Points of law, theories, issues and
arguments not brought to the attention of the lower court will not be considered by the reviewing court. The
defenses not pleaded in the answer cannot, on appeal, change fundamentally the nature of the issue in the case.
To do so would be unfair to the adverse party, who had no opportunity to present evidence in connection with
the new theory; this would offend the basic rules of due process and fair play. 40 (Citation omitted)

While the Court may adopt a liberal stance and relax the rule, no reasonable explanation, however, was
introduced to justify ATI’s failure to timely question the basis of FIRST LEPANTO’s rights as a subrogee.

The fact that the CA took cognizance of and resolved the said issue did not cure or ratify ATI’s faux pas. "[A]
judgment that goes beyond the issues and purports to adjudicate something on which the court did not hear the
parties, is not only irregular but also extrajudicial and invalid." 41 Thus, for resolving an issue not framed during the

Page 51 of 343
pre-trial and on which the parties were not heard during the trial, that portion of the CA’s judgment discussing
the necessity of presenting an insurance contract was erroneous.

At any rate, the non-presentation of the insurance contract is not fatal to FIRST LEPANTO’s right to collect
reimbursement as the subrogee of GASI.

"Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so
that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies
or securities."42 The right of subrogation springs from Article 2207 of the Civil Code which states:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall
be subrogated to the rights of the insured against the wrong-doer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.

As a general rule, the marine insurance policy needs to be presented in evidence before the insurer may recover
the insured value of the lost/damaged cargo in the exercise of its subrogatory right. In Malayan Insurance Co.,
Inc. v.Regis Brokerage Corp.,43 the Court stated that the presentation of the contract constitutive of the insurance
relationship between the consignee and insurer is critical because it is the legal basis of the latter’s right to
subrogation.44

In Home Insurance Corporation v. CA,45 the Court also held that the insurance contract was necessary to prove
that it covered the hauling portion of the shipment and was not limited to the transport of the cargo while at sea.
The shipment in that case passed through six stages with different parties involved in each stage until it reached
the consignee. The insurance contract, which was not presented in evidence, was necessary to determine the
scope of the insurer’s liability, if any, since no evidence was adduced indicating at what stage in the handling
process the damage to the cargo was sustained. 46

An analogous disposition was arrived at in the Wallem 47 case cited by ATI wherein the Court held that the
insurance contract must be presented in evidence in order to determine the extent of its coverage. It was further
ruled therein that the liability of the carrier from whom reimbursement was demanded was not established with
certainty because the alleged shortage incurred by the cargoes was not definitively determined.48

Nevertheless, the rule is not inflexible. In certain instances, the Court has admitted exceptions by declaring that a
marine insurance policy is dispensable evidence in reimbursement claims instituted by the insurer.

In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of subrogation accrues simply upon payment
by the insurance company of the insurance claim. Hence, presentation in evidence of the marine insurance policy
is not indispensable before the insurer may recover from the common carrier the insured value of the lost cargo
in the exercise of its subrogatory right. The subrogation receipt, by itself, was held sufficient to establish not only
the relationship between the insurer and consignee, but also the amount paid to settle the insurance claim. The
presentation of the insurance contract was deemed not fatal to the insurer’s cause of action because the loss of
the cargo undoubtedly occurred while on board the petitioner’s vessel. 50

The same rationale was the basis of the judgment in International Container Terminal Services, Inc. v. FGU
Insurance Corporation,51 wherein the arrastre operator was found liable for the lost shipment despite the failure
of the insurance company to offer in evidence the insurance contract or policy. As in Delsan, it was certain that
the loss of the cargo occurred while in the petitioner’s custody. 52

Based on the attendant facts of the instant case, the application of the exception is warranted. 1âwphi1 As
discussed above, it is already settled that the loss/damage to the GASI’s shipment occurred while they were in
ATI’s custody, possession and control as arrastre operator. Verily, the Certificate of Insurance 53 and the Release of
Claim54presented as evidence sufficiently established FIRST LEPANTO’s right to collect reimbursement as the
subrogee of the consignee, GASI.
Page 52 of 343
With ATI’s liability having been positively established, to strictly require the presentation of the insurance contract
will run counter to the principle of equity upon which the doctrine of subrogation is premised. Subrogation is
designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice, equity and good conscience ought to pay. 55

The payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies
which the insured may have against the third party whose negligence or wrongful act caused the loss. The right
of subrogation is not dependent upon, nor does it grow out of any privity of contract or upon payment by the
insurance company of the insurance claim. It accrues simply upon payment by the insurance company of the
insurance claim.56

ATI cannot invoke prescription

ATI argued that the consignee, thru its insurer, FIRST LEPANTO is barred from seeking payment for the
lost/damaged shipment because the claim letter of GASI to ATI was served only on September 27, 1996 or more
than one month from the date the shipment was delivered to the consignee’s warehouse on August 9, 1996. The
claim of GASI was thus filed beyond the 15-day period stated in ATI’s Management Contract with PPA which in
turn was reproduced in the gate passes issued to the consignee’s broker, PROVEN, as follows:

Issuance of this Gate Pass Constitutes delivery to and receipt by consignee of the goods as described above in
good order and condition unless an accompanying x x x certificates duly issued and noted on the face of this
Gate Pass appeals. [sic]

This Gate pass is subject to all terms and conditions defined in the Management Contract between the Philippine
Port[s] Authority and Asian Terminals, Inc. and amendment thereto and alterations thereof particularly but not
limited to the [A]rticle VI thereof, limiting the contractor’s liability to [P]5,000.00 per package unless the
importation is otherwise specified or manifested or communicated in writing together with the invoice value and
supported by a certified packing list to the contractor by the interested party or parties before the discharge of
the goods and corresponding arrastre charges have been paid providing exception or restrictions from liability
releasing the contractor from liability among others unless a formal claim with the required annexes shall have
been filed with the contractor within fifteen (15) days from date of issuance by the contractors or certificate of
loss, damages, injury, or Certificate of non-delivery.57

The contention is bereft of merit. As clarified in Insurance Company of North America v. Asian Terminals,
Inc.,58substantial compliance with the 15-day time limitation is allowed provided that the consignee has made a
provisional claim thru a request for bad order survey or examination report, viz:

Although the formal claim was filed beyond the 15-day period from the issuance of the examination report on the
request for bad order survey, the purpose of the time limitations for the filing of claims had already been fully
satisfied by the request of the consignee’s broker for a bad order survey and by the examination report of the
arrastre operator on the result thereof, as the arrastre operator had become aware of and had verified the facts
giving rise to its liability. Hence, the arrastre operator suffered no prejudice by the lack of strict compliance with
the 15-day limitation to file the formal complaint.59 (Citations omitted)

In the present case, ATI was notified of the loss/damage to the subject shipment as early as August 9, 1996 thru a
Request for Bad Order Survey60 jointly prepared by the consignee’s broker, PROVEN, and the representatives of
ATI. For having submitted a provisional claim, GASI is thus deemed to have substantially complied with the notice
requirement to the arrastre operator notwithstanding that a formal claim was sent to the latter only on
September 27, 1996. ATI was not deprived the best opportunity to probe immediately the veracity of such claims.
Verily then, GASI, thru its subrogee FIRST LEPANTO, is not barred by filing the herein action in court.

ATI cannot rely on the ruling in Prudentiat61 because the consignee therein made no provisional claim thru
request for bad order survey and instead filed a claim for the first time after four months from receipt of the
shipment.

Page 53 of 343
Attorney's fees and interests

All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65, 772.40 representing the insurance indemnity
paid by the latter to GASI. Pursuant to Nacar v. Gallery Frames, 62 the said amount shall earn a legal interest at the
rate of six percent (6%) per annum from the date of finality of this judgment until its full satisfaction.

As correctly imposed by the RTC and the CA, ten percent (10%) of the judgment award is reasonable as and for
attorney's fees considering the length of time that has passed in prosecuting the claim. 63

WHEREFORE, premises considered, the petition is hereby DENIED. The Decision dated October 10, 2008 of the
Court of Appeals in CA-G.R. SP No. 99021 is hereby AFFIRMED insofar as it adjudged liable and ordered Asian
Terminals, Inc., to pay First Lepanto-Taisho Insurance Corp., the amount of ₱165,772.40, ten percent (10%) thereof
as and for attorney's fees, plus costs of suit. The said amount shall earn legal interest at the rate of six percent (
6%) per annum from the date of finality of this judgment until its full satisfaction.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

G.R. No. 172404 August 13, 2014

PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION, a.k.a. PEOPLE'S GENERAL INSURANCE

CORPORATION, Petitioner,
vs.
DOCTORS OF NEW MILLENNIUM HOLDINGS, INC., Respondent.

DECISION

LEONEN, J.:

The liabilities of an insurer under the surety bond are not extinguished when the modifications in the principal
contract do not sub'stantially or materially alter the principal's obligations. The surety is jointly and severally liable
with its principal when the latter defaults from its obligations under the principal contract.

This is a petition for review on certiorari under Rule 45 of the Rules of Court, praying for the reversal of the
decision1of the Court of Appeals which set aside the decision 2 of the Regional Trial Court of Pasig City, Branch
267. In the assailed decision,the Court of Appeals held People's General Insurance Corporation and Million State
Development Corporation jointly and severally liable to respondent Doctors of New Millennium Holdings, Inc.

As found by the trial court and the Court of Appeals, the facts are as follows.

Doctors of New Millennium Holdings, Inc. is a domestic corporation comprised of about 80 doctors. On March 2,
1999, it entered into a construction and development agreement (signed agreement) with Million State
Development Corporation, a contractor, for the construction of a 200-bed capacity hospital in Cainta, Rizal.3

According to the terms of the signed agreement, Doctors of New Millennium obliged itself to pay ₱10,000,000.00
to Million State Development at the time of the signingof the agreement to commence the construction of the
hospital. Million State Development was to shoulder 95% of the project cost and committed itself to secure
₱385,000,000.00 within 25 banking days from Doctors of New Millennium’s initial payment, 4 part of which was to
be used for the purchase of the lot where the hospital was to be constructed. 5

As part of the conditions prior tothe initial payment, Million State Development submitted a surety bond of
₱10,000,000.00 to Doctors of New Millennium. The surety bond was issued by People’s Trans-East Asia Insurance

Page 54 of 343
Corporation, now known as People’s General Insurance Corporation. Doctors of New Millennium, on the other
hand, made the initial payment of ₱10,000,000.00.6

Million State Development, however, failed to comply with its obligation to secure ₱385,000,000.00 within 25
banking days from initial payment.7 On April 7, 1999, it faxed a letter to Doctors of New Millennium explaining its
delay was caused by its foreign creditors’ delay in processing its application.8

On April 9, 1999, Doctors of New Millennium sent a formal demand letter to Million State Development for the
remittance of the funds to be used for the purchase of the lot and demanding for the cost of money from the
time the remittance was due. Instead of replying to the demand letter, Million State Development sent another
letter on April 16, 1999, explaining that they would have their standby letter of credit within 15 banking days. 9

When Million State Development reneged on its obligations, Doctors of New Millennium sent a demand letter
dated June 14, 1999 to People’s General Insurance for the return of itsinitial payment of ₱10,000,000.00, in
accordance with its surety bond.10 On July 9, 1999, Doctors of New Millennium sent another letter to People’s
General Insurance, this time furnishing a copy to the Insurance Commission. The Insurance Commission referred
the matter to its Public Assistance and Investigation Division, which conducted conciliation proceeding.11

After several conferences, People’s General Insurance sent a letter dated September 15, 1999 to then Insurance
Commissioner Eduardo T. Malinis, stating that Doctors of New Millennium’s surety claim was denied on the
ground that the guarantee only extended to "the full and faithful construction of a First Class 200 hospital bed
building"12and not to "the ‘funding’ of the construction of the hospital." 13 As a result of the letter, the conciliation
proceedings were terminated, and Doctors of New Millennium filed an administrative complaint for unfair claim
settlementpractice against People’s General Insurance. 14

On October 5, 1999, while the administrative complaint was pending before the Insurance Commission, Doctors
of New Millennium sent a demand letter to Million State Development for the return of their initial payment of
₱10,000,000.00.15 Due to Million State Development’s inaction, Doctors of New Millenniumfiled a complaint for
breach of contract with damages with prayerfor the issuance of preliminary attachment against Million State
Development and People’s General Insurance with the Regional Trial Court of Pasig City. 16

In the proceedings before the trial court, Million State Development did not appear or submit any responsive
pleading and was declared in default. The trial court resolved the issues of the case only as to the remaining
parties and primarily involving the surety bond. 17

Doctors of New Millennium, represented by its President, Dr. Cenon Alfonso, testified that the surety bond was
entered into to protect the release of the ₱10,000,000.00 initial mobilization fund. People’s General Insurance, on
the other hand, represented by its President, Manual Liboro, testified that its liability was only limited to the
construction of the hospital.18

Mr. Liboro also argued that the terms of the surety bond were based on the Draft Construction and Development
Agreement (draft agreement). It alleged that without its knowledge and consent, Doctors of New Millennium and
Million State Development substantially altered the conditions of the draft agreement by inserting the clause"or
the Project Owner’s waiver," which appeared in the signed agreement. 19

The draft agreement stated:

ARTICLE XIII
CONDITIONS TO DISBURSEMENT OF INITIAL PAYMENT

13.1 The obligations of the Project Owner to pay to the Contractor the amount constituting the Initial Payment
shall be subject to and shall be made on the date (the"Closing Date") following the fulfillment of the following
conditions:

Page 55 of 343
 (a) the approval and selections by the Project Owner of the subcontractor that shall perform the Works,
in accordance with Section 5.1[;]

(b) the submission by the Contractor of a breakdown of the phases of the Work to be performed in
pursuance of the Project, the corresponding percentage value and weight of each such phase, and the
schedule of the Works indicating the chronological order in which the Contractor proposed to carry out
such Works, together with the dates on which each phase of work shall be completed (the "Schedule of
Work");

(c) the submission by the Contractor of a copy of the (Surety Bond) in the form and substance
satisfactory to the Project Owner, in accordance with Section 9.1;

(d) the submission by the Contractor of proof of a firm commitment by banking institution(s) to fund the
Project in the form of a committed credit line and representing committed funds in the amount not less
than the Contract Price, or such other similar financing arrangements acceptable to the Project Owner;
and

(e) the compliance by the Contractorwith all the obligations required to be performed by the Contractor
as of the Closing Date.20

The same provisions appeared in Article XIII ofthe signed agreement, except for its first paragraph, which stated:

ARTICLE XIII
CONDITIONS TO DISBURSEMENT OF INITIAL PAYMENT

13.1 The obligation of the Project Owner to pay to the Contractor the amount constituting the Initial Payment
shall be subject to and shall be made on the date (the"Closing Date") following the fulfillment or the Project
Owner’s waiver of the following conditions: . . . (Emphasis supplied) 21

Mr. Liboro claimed that they became aware of the alteration during the conciliation proceedings before the
Insurance Commission.22

On February 18, 2002, the Insurance Commission rendered its decision on the administrative complaint, finding
that People’s General Insurance engaged in unfair claim settlement practice under Section 241(1) of the Insurance
Code. The Commission imposed a fine of ₱500.00, the suspension of its certificate of registration of its bond
underwriter for six months, and the suspension of its authority to issue bonds for six months. 23

On August 25, 2004, the trial court rendered its decision 24 finding only Million State Development liable
toDoctors of New Millennium. It discharged People’s General Insurance from any liability on the ground that the
inclusion of the clause "or the Project Owner’s waiver" in the signed agreement was a novation of the draft
agreement. It found that the Doctors of New Millennium’s right under the surety bond can only be exercised
upon the fulfillment of the conditions provided for in Article XIII(13.1). 25 The dispositive portion states:

WHEREFORE, IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered declaring the
defaulted defendant Contractor, Million State Development Corporation represented by Peter A. Perez, President
solely liable to plaintiff Doctors of New Millen[n]ium Holdings, Inc., represented by Cenon R. Alfonso in the
amount of Ten Million Pesos (Ph₱10,000,000.00), plus legal interests from October 1999 until fully paid.
Saiddefendant Contractor is likewise directed to pay plaintiff the amountof Ph₱150,000.00 as attorney’s fees and
litigation expenses as well as the costs of the suit.

In the meantime, the instant complaint as against the defendant People’s Trans East Asia Insurance Corporation
a.k.a. People’s General Insurance Corporation is hereby dismissed for lack of merit.

SO ORDERED.26

Page 56 of 343
Upon the denial of its motion for partial reconsideration, Doctors of New Millennium filed an appeal with the
Court of Appeals, seeking the reversal of the trial court’s finding that the surety was not liable. 27

On December 29, 2005, the Court of Appeals rendered a decision28 granting the appeal and holding People’s
General Insurance jointly and severally liable with Million State Development.

The appellate court found that the surety bond was made to cover for the initial payment made by Doctors of
New Millennium. Citing the Whereas Clause of the surety bond, it ruled that People’s General Insurance
guaranteed not only the construction ofthe hospital but also secured the initial payment in case the contractor
defaults.29 The surety bond stated:

That we MILLION STATE DEVELOPMENT CORPORATION . . ., as principal, and PEOPLE’S TRANS-EAST ASIA
INSURANCE CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the
Philippines, as surety, are held and firmly bound unto the DOCTORS OF NEW MILLENNIUM HOLDINGS, INC. . . .
in the sum of TEN MILLION PESOS ONLY (10,000,000.00) Philippine Currency, for the payment of which sum, well
and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns jointly and
severallyfirmly by these presents:

The condition[s] of this obligation are as follows:

WHEREAS, the above bounded principal, on the 2nd day of March, 1999 entered into a construction and Dev’t.
Agreement with DOCTORS OF NEW MILLENNIUM HOLDINGS, INC. to full and faithfully guarantee for the
construction of a first class 200 bed capacity hospital building project Site.

WHEREAS, the DOCTORS OF NEW MILLENNIUM HOLDINGS, INC. requires the Principal to post a Surety
(Downpayment) Bond in the above-stated sum to guarantee the repayment of the downpayment as provided
under the terms and conditions of its contract with the obligee, a copy of which is hereto attached and made an
integral part of this bond.

WHEREAS, the liability of the herein Surety shall in no case exceed the sum of TEN MILLION PESOS
(₱10,000,000.00) ONLY, Philippine Currency.

WHEREAS, said DOCTORSOF NEW MILLENNIUM HOLDINGS, INC. requires said principal to give a good and
sufficient bond in the above stated sum to securethe full and faithful performance on his part said contract
agreement.

NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms,
conditions, and agreements stipulated in said contractagreement then, this obligation shall be null and void,
otherwise it shall remain in full force and effect.30

The appellate court also ruled thatthe Doctors of New Millennium’s waiver of the preconditions stated in Article
XIII of the signed agreement did not increase the surety’s risk since it has"absolutely no relation at all and are not
material to the undertaking of People’s General Insurance to guarantee repayment." 31 The dispositive portion of
the decision states:

WHEREFORE, the judgment appealed as regards the dismissal of the complaint against defendant People’s
General Insurance is hereby REVERSED and SET ASIDE. Surety is hereby adjudged jointly and severally liable with
Million State Development Corporation for the damages suffered by the plaintiff in a) the amount of ten million
pesos (₱10,000,000.00), plus legal interests fromOctober 1999 until fully paid and; b) the amount of ₱200,000.00
representing attorney’s fees and litigation expenses. Costs against defendants.

SO ORDERED.32

Page 57 of 343
People’s General Insurance filed a motion for reconsideration, which the Court of Appeals denied in a resolution
dated April 20, 2006. Aggrieved, it filed the present petition for review on certiorari praying for the reversal of the
decision of the Court of Appeals.33

People’s General Insurance argues that Million State Development furnished it a copy of the draft agreement with
the assurance that the same terms and conditions would be embodied in the signed agreement. It argues that
when the parties inserted the clause "or the Project Owner’s waiver," it substantially altered the terms and
conditions of the contract as "they exponentially increase[d] the risk that petitioner was willing to take as
surety."34 It explains that under the draft agreement, Million State Development "must hurdle certain stringent
requirements"35 before the ₱10,000,000.00 initial payment could be released to it. 36

Petitioner People’s General Insurance also alleges that because of the disputed clause, the initial payment was
released to the contractor on the pretext that the preconditions were already waived by Doctors of New
Millennium.37 It argues that the clause "effectively deprived [it] of the opportunity to objectively assess the realrisk
of its undertaking and fix the reasonable rate of premium thereon." 38 This, it argues, constituted an implied
novation, which should automatically relieve it from its undertaking as a surety as it makes its obligation more
onerous.39

Doctors of New Millennium, on the other hand, argues that there was no novation since the draft agreement was
not yet a valid and binding contract between it and Million State Development. It alleged that Million State
Development entered into a surety agreement with People’s General Insurance on the basis of the draft
agreement without its knowledge.40

It also argues that if People’s General Insurance disagreed with the terms and conditions of the signed
agreement, it should have informed Doctors of New Millennium or Million State Development of the matter since
the premium payment of 158,792.50 remained in its possession, control, and disposal. 41

We are asked to resolve the issue of whether the surety bond guaranteeing respondent Doctors of New
Millennium’s initial payment was impliedly novated by the insertion of a clause in the principal contract, which
waived the conditions for the initial payment’s release.

The petition is without merit

The principal contract of the suretyship is the signed agreement

The obligations of the surety to the principal under the surety bond are different from the obligations of the
contractor to the client under the principal contract. The surety guarantees the performanceof the contractor’s
obligations. Upon the contractor’s default,its client may demand against the surety bond even ifthere was no
privity of contract between them. This is the essence of a surety agreement.

The definition of a surety is provided for under the Civil Code, which states:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship.

In Stronghold Insurance Company v. Tokyu Construction Company: 42

A contract of suretyship is an agreement whereby a party, called the surety, guarantees the performance by
another party, called the principal or obligor, of an obligation or undertaking in favor of another party, called the
obligee. By its verynature, under the laws regulating suretyship, the liability of the surety is joint and several but is
limited to the amount of the bond, and its terms are determined strictly by the terms of the contract of suretyship
in relation to the principal contract between the obligor and the obligee. 43
Page 58 of 343
In American Home Insurance Co. v. F. F. Cruz:44

The surety is considered in law aspossessed of the identity of the debtor in relation to whatever is adjudged
touching upon the obligation of the latter. Their liabilities are so interwoven as to be inseparable. Although the
contract of suretyship is, in essence, secondary only to a valid principal obligation, the surety’s liability to the
creditor is direct, primary, and absolute; he becomes liable for the debt and duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom. 45

In this case, the surety bond was executed "to guarantee the repayment of the downpayment"46 and "to secure
the full and faithful performance"47 of Million State Development. According to the terms of the bond, People’s
General Insurance bound itself to be liable in the amount of ₱10,000,000.00 in the event that Million State
Development defaults in its obligations. 48

Petitioner, however, contends that the inclusion of the clause "or the Project Owner’s waiver" in Article XIII of the
signed agreement made its obligations more onerous and, therefore,the surety must be released from its bond.

A suretyship consists of two different contracts: (1) the surety contract and (2) the principal contract which it
guarantees. Since the insurer’s liability is strictly based only on the terms stated in the surety contract in relation
to the principal contract, any change in the principal contract, which materially alters the principal’s obligations
would, in effect, constitute an implied novation of the surety contract:

[A] surety is released from its obligation when there is a material alteration of the contract in connection with
which the bond is given, such as a change which imposes a new obligation on the promising party, or which
takes away some obligation already imposed, or one which changes the legal effect of the original contract and
not merely its form. A surety, however, is not released by a change in the contract which does not have the effect
of making its obligation more onerous. 49

Petitioner insists that the principal contract of the suretyship was the draft agreement since it was assured byits
principal that the draft would embody the same terms and conditions asthe final signed agreement. The insertion
of the disputed clause in the signed agreement, it argues, "effectively deprived petitioner of the opportunity to
objectively assess the real risk of its undertaking and fix the reasonable rate of premium thereon." 50

This argument is unmeritorious.

In his testimony before the trial court, Mr. Liboro, representing petitioner, admitted that the signed copyof the
agreement was attached to the surety bond when it was returned to them by Million State Development and
respondent:

ATTY. PEREZ: Do I get it correct Mr. Witness that after the contract was finalize[d], it was attached to the bond
and returned to you?

A: Yes, it was returned to us together with the attachment.

ATTY. PEREZ: So, that was maybe if the payment was made on March 3, 1999 about March 4, 1999 [sic] you have
a copy of the final draft already? It was attached to your bond?

A: It was attached to our copy of the bond. 51

Mr. Liboro also admitted that they were not diligent in reviewing the documents presented to them and merely
relied on their principal’s assurances of the content of the documents:

ATTY. PEREZ:

Q: Is that normal procedure inyour company that you evaluate an application on the basis of a mere draft?

Page 59 of 343
WITNESS:

A: Draft is for us to study whether we can accept or not. In fact, that is the first requirement you have the contract
submitted and we have to study, but once the bond is to be issued, there are some other requirements that you
have to comply with. That is the initial requirement.

Q: But do you remember having mentioned that it came to your knowledge that the final signed contract
agreement between Million State Development Corporation and the Doctors of New Millennium happened two
(2) days after you issued the bond?

A: No, only one (1) day. In factI did not evenobserve until later on when they were reviewing this bond, from the
lawyer "pa nanggaling yon; hindi naman napupuna iyon eh."I have trust and confidence that the final draft was
the same draft that was drafted.52

Petitioner, as the surety, had the responsibility to read through the terms of the principal contract; it cannot
simply rely on the assurances of its principal. It was petitioner’s duty to carefully scrutinize the agreement since
the Insurance Code mandates that its liability is determined strictly in accordance with the provisions of the
principal contract:

Sec. 176. The liability of the suretyor sureties shall be joint and several with the obligor and shall be limited to the
amount of the bond. It is determined strictly bythe terms of the contract of suretyship in relation to the principal
contract between the obligor and the obligee. 53

If petitioner had any objection to the terms of the signed agreement, it could have pointed it out before its
principal defaults and it becomes liable under the surety bond. The silence ofpetitioner must be taken against it
since it was responsible for exerting diligence in the conduct of its affairs.

Even the Insurance Commission was aware that petitioner acted irresponsibly when it issued the surety bond:

This Commission, however, took notice of the laxity or irresponsible underwriting practice ofrespondent insurance
company’s bond underwriter when the latter did notrequire a collateral security for this kind of bond considering
that the business of suretyship is a very risky one. It would have been easier for respondent company to settle the
claim had there been a collateral given by the principal when the latter defaulted from the obligation under the
contract.54

Petitioner’s failure to notice the changes in the signed agreement was due to its own fault and not to any
deception on the part of respondent. Respondent was not privy to the terms of the surety bond entered into by
petitioner and Million State Development. If there were any changes in the contract that petitioner should have
been aware of, it was Million State Development, as its principal, which had the duty to inform them about the
changes.

On the basis of petitioner’s own admissions, the principal contract of the suretyship is the signed agreement. The
surety, therefore, is presumed to have acquiesced to the terms and conditions embodied in the principal contract
when it issued its surety bond. Accordingly, petitioner cannot argue that the insertion of the clause inthe signed
agreement constituted an implied novation of the obligation which extinguished its obligations as a surety since
there was nothing to novate: [I]n order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every
point incompatible with each other. Novation of a contractis never presumed. In the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on every point. 55

Even if we were to assume, for the sake of argument, that the principal contract in the suretyship was the draft
agreement, the addition of the clause "or the Project Owner’s waiver" in the signed agreement does not operate
as a novation of petitioner’s liability under the surety bond.

Page 60 of 343
The disputed clause is not material to People’s General Insurance’s undertaking to guarantee Doctors of New
Millennium’s initial payment

Respondent’s waiver of the conditionsset forth under Article XIII of the agreement does not substantially or
materially alter petitioner’s obligation to guarantee the performance of its principal, Million State Development.
Article XIII states:

ARTICLE XIII

CONDITIONS TO DISBURSEMENT OF INITIAL PAYMENT

13.1 The obligation of the Project Owner to pay to the Contractor the amount constituting the Initial Payment
shall be subject to and shall be made on the date (the "Closing date") following the fulfillment or the Project
Owner’s waiver of the following conditions:

(a) the approval and selection by the Project Owner of the Subcontractor that shall perform the Works, in
accordance with Section 5.1;

(b) the submission by the Contractor of a breakdown of the phases of the Work to be performed in
pursuance of the Project, the corresponding percentage value and weight of each such phase, and a
schedule of the Works indicating the chronological order in which the Contractor proposes to carry out
such Works, together with the dates on which each phase of work shall be completed (the "Schedule of
Work");

(c) the submission by the Contractor of a copy of the (Surety Bond) in the form and substance
satisfactory to the Project Owner, in accordance with Section 9.1;

(d) the submission by the Contractor of proof of a firm commitment by banking institution(s) to fund the
Project in the form of a committed credit line and representing committed funds in an amount not less
than the Contract Price, or such other similar financing arrangements acceptable to the Project Owner;
and

(e) the compliance by the Contractor with all obligations required to be performed by the Contractor as
of the Closing Date.56

These conditions, however, only embody a portion of Million State Development’s obligations to respondent.

Petitioner, as a surety, bound itself to guarantee the repayment of the initial price in the event that Million State
Development fails to perform not only the conditions under Article XIII but all its obligations under the signed
agreement. This is clear from the terms of the surety bond: WHEREAS, the DOCTORS OF NEW MILLENNIUM
HOLDINGS, INC. requires the Principal to post a Surety (Downpayment) Bond in the above-stated sum to
guarantee the repayment of the downpayment as provided under the terms and conditions of its contract with
the obligee, a copy of which is hereto attached and made an integral part of this bond. 57

The conditions under Article XIII ofthe signed agreement refer only to the conditions that Million State
Development was responsible for so that initial payment could be disbursed to them. 1âwphi1 Petitioner failed to
take into account that Article XIII must be read together with ArticleIX, which states:

Article IX
SECURITY FOR CONTRACTOR’S OBLIGATIONS

9.1 Upon receipt of the execution of this Agreement, the Contractor shall deliver to the Project Owner a Surety
bond for the amount equal to the Initial Payment of TEN MILLION PESOS (Ph₱10,000,000.00) secured from
Peoples Trans-East Asia Insurance Corporation for the purpose of securing the performance by the Contractor of
its obligations in accordance with the terms and conditions of this Agreement as set out in Annex F and shall be
Page 61 of 343
valid until the issuance by the Project Owner of the Certificate of Final Acceptance of the Project, provided that
the amount available to be drawn under the Surety Bond shall be reduced semi-annually commencing six (6)
months from the date of Initial Payment and in proportion to such work, services, materials, supplies and
equipment certified by the Project Owner to have been performed, completed or provided during the relevant six
month period.58

Article IX requires Million State Development to procure a surety bond to cover the initial payment "upon the
execution of the Agreement," and not upon the fulfillment of the conditions under Article XIII. Any waiver by
respondent of the conditions for the release of the initial payment would not affect the conditions by which the
surety bond was issued.1âwphi1

Million State Development’s obligations under the contract subsist regardless of whether respondent waives the
conditions for the release of the initial payment. Its obligation upon the release of the initial payment was for it to
"make available the funds constituting the Balance Payment . . . [in] the amount of THREE HUNDRED EIGHTY-FIVE
MILLION PESOS (Ph₱385,000,000.00), within twenty-five(25) banking days from payment by the Project Owner of
the Initial Payment."59 It is this performance of this obligation that the surety primarily guarantees.

Even the Insurance Commission arrived at the same conclusion when it found that:

It appears from the provisions of Art. [VII] 7.5 of the Agreement that the initial payment of ₱10 million serves as a
basis and a reckoning for the "Contractor to make available the funds constituting the Balance Payment under
the following schedule: a) the amount of ₱385 million within 25 days from payment by the Project Owner of the
Initial Payment xxx." Considering that the contractor failed to provide for the Balance Payment on the prescribed
due date, he has the obligation to return what he has received so as not to unjustly enrich himself at the expense
of the other. It can be inferred[,] therefore,that the undertaking pertains to the return of the initial payment of ₱10
million.60

Petitioner cannot feign ignorance of Million State Development’s obligation to provide the funds for the balance
since this provision was present in both the draft agreement and the signed agreement. 61 Since Million State
Development failed to fulfillits obligation, the surety becomes jointly and severally liable for the amount of the
bond.

The award of attorney’s fees must be deleted

The trial court and the Court of Appeals awarded attorney’s fees to respondent without giving any factual or legal
basis for the award. The award merely appeared on the dispositive portion of the lower court’s rulings without
explanation or justification.

As we have stated in Philippine National Construction Corporation v. APAC Marketing Corporation:62

The general rule is thatattorney’s fees cannot be recovered as part of damages because of the policy that no
premium should be placed on the right to litigate. They are not to be awarded every time a party wins a suit. The
power of the court to award attorney’s fees under Article 2208 63 demands factual, legal, and equitable
justification. Even when a claimant is compelled to litigate with third persons or to incur expenses to protect his
rights, still attorney’s fees may not be awarded where no sufficient showing of bad faith could be reflected in a
party’s persistence in a case other than an erroneous conviction of the righteousness of his cause. 64

As respondent has not shown any justification as to its award of attorney’s fees, the samemust be deleted.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. CV No. 84645 dated
December 29, 2005 is AFFIRMEDwith MODIFICATION. Petitioner People’s General Insurance Corporation is held
jointly and severally liable with Million State Development Corporation for the payment of ₱10,000,000.00 with
legal interest of 12% per annum from June14, 1999 until June 30, 2013 and legal interest of 6% per annum from
July 1, 2013 until fully paid.65 The award of ₱200,000.00 representing attorney’s fees and litigation expenses is
DELETED.
Page 62 of 343
SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

G.R. No. 152334 September 24, 2014

H.H. HOLLERO CONSTRUCTION, INC., Petitioner,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM and POOL OF MACHINERY INSURERS, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated March 13, 2001 and the Resolution3 dated
February 21, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63175, which set aside and reversed the
Judgment4 dated February 3, 1999 of the Regional Trial Court of Quezon City, Branch 220 (RTC) in Civil Case No.
91-10144, and dismissed petitioner H.H. Hollero Construction, Inc.' s (petitioner) Complaint for Sum of Money and
Damages under the insurance policies issued by public respondent, the Government Service Insurance System
(GSIS), on the ground of prescription.

The Facts

On April 26, 1988, the GSIS and petitioner entered into a Project Agreement (Agreement) whereby the latter
undertook the development of a GSIS housing project known as Modesta Village Section B (Project). 5 Petitioner
obligated itself to insurethe Project, including all the improvements, upon the execution of the Agreement under
a Contractors’ All Risks (CAR) Insurance with the GSIS General Insurance Department for an amount equal to its
cost or sound value, which shall not be subject to any automatic annual reduction.6

Pursuant to its undertaking, petitioner secured CAR Policy No. 88/085 7 in the amount of ₱1,000,000.00 for land
development, which was later increased to ₱10,000,000.00,8 effective from May 2, 1988 to May 2, 1989.9 Petitioner
likewise secured CAR Policy No. 88/08610 in the amount of ₱1,000,000.00 for the construction of twenty (20)
housing units, which amount was later increased to ₱17,750,000.0011 to cover the construction of another 355 new
units, effective from May 2, 1988 toJune 1, 1989.12 In turn, the GSIS reinsured CAR Policy No. 88/085 with
respondent Pool of Machinery Insurers (Pool).13

Under both policies, it was provided that: (a) there must be prior notice of claim for loss, damage or liability
within fourteen (14) days from the occurrence of the loss or damage; 14 (b) all benefits thereunder shall be
forfeited if no action is instituted within twelve(12) months after the rejection of the claim for loss, damage or
liability;15 and (c) if the sum insured is found to be less than the amount required to be insured, the amount
recoverable shall be reduced tosuch proportion before taking into account the deductibles stated in the schedule
(average clause provision).16

During the construction, three (3) typhoons hit the country, namely, Typhoon Biring from June 1 to June 4, 1988,
Typhoon Huaning on July 29, 1988, and Typhoon Saling on October 11, 1989, which caused considerable damage
to the Project.17 Accordingly, petitioner filed several claims for indemnity with the GSIS on June 30, 1988, 18 August
25, 1988,19 and October 18, 1989,20 respectively.

In a letter21 dated April 26, 1990, the GSIS rejected petitioner’s indemnity claims for the damages wrought by
Typhoons Biring and Huaning, finding that no amount is recoverable pursuant to the average clause provision
under the policies.22 In a letter23 dated June 21, 1990, the GSIS similarly rejected petitioner’s indemnity claim for
damages wrought by Typhoon Saling on a "no loss" basis, itappearing from its records that the policies were not
renewed before the onset of the said typhoon. 24

Page 63 of 343
In a letter25 dated April 18, 1991, petitioner impugned the rejection of its claims for damages/loss on accountof
Typhoon Saling, and reiterated its demand for the settlement of its claims.

On September 27, 1991, petitioner filed a Complaint 26 for Sum of Money and Damages before the RTC, docketed
as Civil Case No. 91-10144,27 which was opposed by the GSIS through a Motion to Dismiss 28 dated October 25,
1991 on the ground that the causes of action stated therein are barred by the twelve-month limitation provided
under the policies, i.e., the complaint was filed more than one(1) year from the rejection of the indemnity claims.
The RTC, in an Order29 dated May 13, 1993, denied the said motion; hence, the GSIS filed its answer30 with
counterclaims for litigation expenses, attorney’s fees, and exemplary damages. Subsequently, the GSIS filed a
Third Party Complaint31 for indemnification against Pool, the reinsurer.

The RTC Ruling

In a Judgment32 dated February 3, 1999, the RTC granted petitioner’s indemnity claims. It held that: (a) the
average clauseprovision in the policies which did not contain the assentor signature of the petitioner cannot limit
the GSIS’ liability, for being inefficacious and contrary to public policy; 33 (b) petitioner has established that the
damages it sustained were due to the peril insured against; 34 and (c) CAR Policy No. 88/086 was deemed
renewed when the GSIS withheld the amount of 35,855.00 corresponding to the premium payable, 35 from the
retentions it released to petitioner.36 The RTC thereby declared the GSIS liable for petitioner’s indemnity claims for
the damages brought about by the said typhoons, less the stipulated deductions under the policies,plus 6% legal
interest from the dates of extrajudicial demand, as well as for attorney’s fees and costs of suit. It further dismissed
for lack of merit GSIS’s counterclaim and third party complaint. 37

Dissatisfied, the GSIS elevated the matter to the CA. The CA Ruling In a Decision38 dated March 13, 2001, the
CAset aside and reversed the RTC Judgment, thereby dismissing the complaint. It ruled that the complaint filed
on September 27, 1991 was barred by prescription, having been commenced beyond the twelve-month limitation
provided under the policies, reckoned from the final rejection of the indemnity claims on April 26, 1990 and June
21, 1990. The Issue Before the Court

The essential issue for the Court’s resolution is whether or not the CA committed reversible error in dismissing the
complaint onthe ground of prescription.

The Court’s Ruling

The petition lacks merit.

Contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms
which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary, and popular sense. 39

Section 1040 of the General Conditions of the subject CAR Policies commonly read:

10. If a claim is in any respect fraudulent, or if any false declaration is made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any benefit under
this Policy, or if a claim is made and rejected and no action or suit is commenced within twelve months after such
rejectionor, in case of arbitration taking place as provided herein, within twelve months after the Arbitrator or
Arbitrators or Umpire have made their award, all benefit under this Policy shall be forfeited. (Emphases supplied)

In this relation, case law illumines that the prescriptive period for the insured’s action for indemnity should
bereckoned from the "final rejection" of the claim. 41

Here, petitioner insists that the GSIS’s letters dated April 26, 1990 and June 21, 1990 did not amount to a "final
rejection" ofits claims, arguing that they were mere tentative resolutions pending further action on petitioner’s
part or submission of proof in refutation of the reasons for rejection. 42 Hence, its causes of action for indemnity
did not accrue on those dates.
Page 64 of 343
The Court does not agree.

A perusal of the letter43 dated April 26, 1990 shows that the GSIS denied petitioner’s indemnity claims wrought by
Typhoons Biring and Huaning, it appearing that no amount was recoverable under the policies. While the GSIS
gave petitioner the opportunity to dispute its findings, neither of the parties pursued any further action on the
matter; this logically shows that they deemed the said letter as a rejection of the claims. Lest it cause any
confusion, the statement in that letter pertaining to any queries petitioner may have on the denial should be
construed, at best, as a form of notice to the former that it had the opportunity to seek reconsideration of the
GSIS’s rejection. Surely, petitioner cannot construe the said letter to be a mere "tentative resolution." In fact,
despite its disavowals, petitioner admitted in its pleadings 44 that the GSIS indeed denied its claim through the
aforementioned letter, buttarried in commencing the necessary action in court.

The same conclusion obtains for the letter 45 dated June 21, 1990 denying petitioner’s indemnity claim caused by
Typhoon Saling on a "no loss" basis due to the non-renewal of the policies therefor before the onset of the said
typhoon. The fact that petitioner filed a letter46 of reconsideration therefrom dated April 18, 1991, considering too
the inaction of the GSIS on the same similarly shows that the June 21, 1990 letter was also a final rejection of
petitioner’s indemnity claim.

As correctly observed by the CA, "final rejection" simply means denial by the insurer of the claims of the insured
and not the rejection or denial by the insurer of the insured’s motion or request for reconsideration.47 The
rejection referred to should be construed as the rejection in the first instance, 48 as in the two instances above-
discussed.

Comparable to the foregoing is the Court’s action in the case of Sun Insurance Office, Ltd. v. CA 49 wherein it
debunked "[t]he contention of the respondents [therein] that the one-year prescriptive period does not start to
run until the petition for reconsideration had been resolved by the insurer," holding that such view "runs counter
to the declared purpose for requiring that an action or suit be filed in the Insurance Commission or in a court of
competent jurisdiction from the denial of the claim." 50 In this regard, the Court rationalized that
"uphold[ing]respondents' contention would contradict and defeat the very principle which this Court had laid
down. Moreover, it can easily be used by insured persons as a scheme or device to waste time until any evidence
which may be considered against them is destroyed." 51 Expounding on the matter, the Court had this to say:

The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent’s view, two rulings of this Court have been cited, namely, the case of Eagle Star
Insurance Co.vs.Chia Yu ([supra note 41]), where the Court held:

The right of the insured to the payment of his loss accrues from the happening of the loss. However, the cause of
action in an insurance contract does not accrue until the insured’s claim is finally rejected by the insurer. This is
because before such final rejection there is no real necessity for bringing suit.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding that:

Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated
obligation of the defendant in violation of the said legal right, the cause of action does not accrue until the party
obligated (surety) refuses, expressly or impliedly, to comply with its duty (in this case to pay the amount of the
bond)."

Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured' s cause of
action or his right to file a claim either in the Insurance Commission or in a court of competent jurisdiction [as in
this case] commences from the time of the denial of his claim by the Insurer, either expressly or impliedly. 1âwphi1

But as pointed out by the petitioner insurance company, the rejection referred to should be construed as the
rejection, in the first instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a
yetition for reconsideration, such should have been expressly stipulated. 52
Page 65 of 343
In light of the foregoing, it is thus clear that petitioner's causes of action for indemnity respectively accrued from
its receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its claims in the first
instance. Consequently, given that it allowed more than twelve (12) months to lapse before filing the necessary
complaint before the R TC on September 27, 1991, its causes of action had already prescribed.

WHEREFORE, the petition is DENIED. The Decision dated March 13, 2001 and the Resolution dated February 21,
2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63175 are hereby AFFIRMED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

G.R. No. 183272 October 15, 2014

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,

vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO TAN KIT, respondents.

DECISION

DEL CASTILLO, J.:

The Court of Appeals' (CA) imposition of 12o/o interest on the ₱13,080.93 premium refund is the only matter in
question in this case.

This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in CA-GR. CV No. 86923,
which, among others, imposed a 12% per annum rate of interest reckoned from the time of death of the insured
until fully paid, on the premium to be reimbursed by petitioner Sun Life of Canada (Philippines), Inc. (petitioner)
to respondents Sandra Tan Kit (respondent Tan Kit) and the Estate of the Deceased Norberto Tan Kit (respondent
estate). Likewise assailed in this Petition is the CA's June 12, 2008 Resolution 3 denying petitioner's Motion for
Reconsideration of the said Decision.

Factual Antecedents

Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto), whose application
for a life insurance policy,4 with face value of ₱300,000.00, was granted by petitioner on October 28, 1999. On
February 19, 2001, or within the two-year contestability period,5 Norberto died of disseminated gastric
carcinoma.6Consequently, respondent Tan Kit filed a claim under the subject policy.

In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on account of Norberto’s
failure to fully and faithfully disclose in his insurance application certain material and relevant information about
his health and smoking history. Specifically, Norberto answered "No" to the question inquiring whether he had
smoked cigarettes or cigars within the last 12 months prior to filling out said application. 8 However, the medical
report of Dr. Anna Chua (Dr. Chua), one of the several physicians that Norberto consulted for his illness, reveals
that he was a smoker and had only stopped smoking in August 1999. According to petitioner, its underwriters
would not have approved Norberto’s application for life insurance had they been given the correct information.
Believing that the policy is null and void, petitioner opined that its liability is limited to the refund of all the
premiums paid. Accordingly, it enclosed in the said letter a check for ₱13,080.93 representing the premium
refund.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the check and insisted on the
payment of the insurance proceeds.

Page 66 of 343
On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance Contract before the Regional Trial
Court (RTC) of Makati City.

Ruling of the Regional Trial Court

In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. Charity Salvador (Dr. Salvador),
conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy E. Javelosa (Javelosa),
answered "NO" to the question "Are you aware of anything about the life to be insured’s lifestyle, hazardous
sports, habits, medical history, or any risk factor that would have an adverse effect on insurability?" in her Agent’s
Report. Javelosa also already knew Norberto two years prior to the approval of the latter’s application for
insurance. The RTC concluded that petitioner, through the above-mentioned circumstances, had already cleared
Norberto of any misrepresentation that he may have committed. The RTC also opined that the affidavit of Dr.
Chua, presented as part of petitioner’s evidence and which confirmed the fact that the insured was a smoker and
only stopped smoking a year ago [1999], is hearsay since Dr. Chua did not testify in court. Further, since Norberto
had a subsisting insurance policy with petitioner during his application for insurance subject of this case, it was
incumbent upon petitioner to ascertain the health condition of Norberto considering the additional burden that it
was assuming. Lastly, petitioner did not comply with the requirements for rescission of insurance contract as held
in Philamcare Health Systems, Inc. v. Court of Appeals. 12 Thus, the dispositive portion of the RTC Decision:

WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of the [respondents and]
against the [petitioner], hence it hereby orders the [petitioner] to pay the [respondent], Sandra Tan Kit, the sum of
Philippine Pesos: THREE HUNDRED THOUSAND (₱300,000.00), representing the face value of the insurance
policy with interest at six percent (6%) per annum from October 4, 2002 until fully paid.

Cost de oficio.

SO ORDERED.13

Petitioner moved for reconsideration,14 but was denied in an Order15 dated February 15, 2006.

Hence, petitioner appealed to the CA.

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated October 17, 2007.

From the records, the CA found that prior to his death, Norberto had consulted two physicians, Dr. Chua on
August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on December 28, 2000, to whom he confided that he had
stopped smoking only in 1999. At the time therefore that he applied for insurance policy on October 28, 1999,
there is no truth to his claim that he did not smoke cigarettes within 12 months prior to the said application. The
CA thus held that Norberto is guilty of concealment which misled petitioner in forming its estimates of the risks of
the insurance policy. This gave petitioner the right to rescind the insurance contract which it properly exercised in
this case.

In addition, the CA held that the content of Norberto’s medical records are deemed admitted by respondents
since they failed to deny the same despite having received from petitioner a Request for Admission pursuant to
Rule 26 of the Rules of Court.17 And since an admission is in the nature of evidence the legal effects of which form
part of the records, the CA discredited the RTC’s ruling that the subject medical records and the affidavits
executed by Norberto’s physicians attesting to the truth of the same were hearsay.

The dispositive portion of the CA Decision reads:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the appealed Decision
REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby rendered GRANTING the complaint a quo.

Page 67 of 343
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing the [premium]
paid by the insured with interest at the rate of 12% per annum from the time of the death of the insured until fully
paid.

SO ORDERED.18

The parties filed their separate motions for reconsideration. 19 While respondents questioned the factual and legal
bases of the CA Decision, petitioner, on the other hand, assailed the imposition of interest on the premium
ordered refunded to respondents.

However, the appellate court denied the motions in its June 12, 2008 Resolution, 20 viz:

WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by the [petitioner] and the
[respondents] are hereby DENIED.

SO ORDERED.21

Only petitioner appealed to this Court through the present Petition for Review on Certiorari.

Issue

The sole issue in this case is whether petitioner is liable to pay interest on the premium to be refunded to
respondents.

The Parties’ Arguments

Petitioner argues that no interest should have been imposed on the premium to be refunded because the CA
Decision does not provide any legal or factual basis therefor; that petitioner directly and timely tendered to
respondents an amount representing the premium refund but they rejected it since they opted to pursue their
claim for the proceeds of the insurance policy; that respondents should bear the consequence of their unsound
decision of rejecting the refund tendered to them; and, that petitioner is not guilty of delay or of invalid or unjust
rescission as to make it liable for interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals, 22 no
interest can be assessed against petitioner.

Respondents, on the other hand, contend that the reimbursement of premium is clearly a money obligation or
one that arises from forbearance of money, hence, the imposition of 12% interest per annum is just, proper and
supported by jurisprudence. While they admit that they refused the tender of payment of the premium refund,
they aver that they only did so because they did not want to abandon their claim for the proceeds of the
insurance policy. In any case, what petitioner should have done under the circumstances was to consign the
amount of payment in court during the pendency of the case.

Our Ruling

Tio Khe Chio is not applicable in this case.

Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the issue of payment of
interest.1âwphi1 There, the Court pointed to Sections 243 and 244 of the Insurance Code which explicitly provide
for payment of interest when there is unjustified refusal or withholding of payment of the claim by the
insurer, 23 and to Article 220924 of the New Civil Code which likewise provides for payment of interest when the
debtor is in delay.

The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment of interest on the
insurance proceeds in which the claim therefor was either unreasonably denied or withheld or the insurer
incurred delay in the payment thereof. In this case, what is involved is an order for petitioner to refund to
respondents the insurance premium paid by Norberto as a consequence of the rescission of the insurance
Page 68 of 343
contract on account of the latter’s concealment of material information in his insurance application. Moreover,
petitioner did not unreasonably deny or withhold the insurance proceeds as it was satisfactorily established that
Norberto was guilty of concealment.

Nature of interest imposed by the CA

There are two kinds of interest – monetary and compensatory.

"Monetary interest refers to the compensation set by the parties for the use or forbearance of money." 25 No such
interest shall be due unless it has been expressly stipulated in writing.26 "On the other hand, compensatory
interest refers to the penalty or indemnity for damages imposed by law or by the courts." 27 The interest
mentioned in Articles 2209 and 2212 28of the Civil Code applies to compensatory interest.29

Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary interest because
aside from the fact that there is no use or forbearance of money involved in this case, the subject interest was not
one which was agreed upon by the parties in writing. This being the case and judging from the tenor of the CA,
to wit:

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing the [premium]
paid by the insured with interest at the rate of 12% per annum from time of death of the insured until fully paid. 30

there can be no other conclusion than that the interest imposed by the appellate court is in the nature of
compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund reckoned from the time of death of
the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven to have failed to comply with his
obligation.31

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was rescinding the
policy due to concealment, petitioner tendered the refund of premium by attaching to the said notice a check
representing the amount of refund. However, respondents refused to accept the same since they were seeking
for the release of the proceeds of the policy. Because of this discord, petitioner filed for judicial rescission of the
contract. Petitioner, after receiving an adverse judgment from the RTC, appealed to the CA. And as may be
recalled, the appellate court found Norberto guilty of concealment and thus upheld the rescission of the
insurance contract and consequently decreed the obligation of petitioner to return to respondents the premium
paid by Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the claim.

Based on the foregoing, we find that petitioner properly complied with its obligation under the law and contract.
Hence, it should not be made liable to pay compensatory interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the premium paid
within 15 days from date of finality of this Decision. If petitioner fails to pay within the said period, then the
amount shall be deemed equivalent to a forbearance of credit. 32 In such a case, the rate of interest shall be 6%
per annum.33

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 86923 is
MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is ordered to reimburse to respondents Sandra
Tan Kit and the Estate of the Deceased Norberto Tan Kit the sum of ~13,080.93 representing the premium paid
by the insured within fifteen (15) days from date of finality of this Decision. If the amount is not reimbursed within
said period, the same shall earn interest of 6% per annum until fully paid.

SO ORDERED.

Page 69 of 343
MARIANO C. DEL CASTILLO
Associate Justice

G.R. No. 185565 November 26, 2014

LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL SHIPPING COMPANY,

INCORPORATED, Petitioners,
vs.
MALAYAN INSURANCE COMPANY, INCORPORATED, Respondent.

DECISION

REYES, J.:

This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company, Incorporated and Loadstar
International Shipping Company, Incorporated (petitioners) against Malayan Insurance Company, Incorporated
(Malayan) seeking to set aside the Decision 2 dated April 14, 2008 and Resolution 3 dated December 11, 2008 of the
Court of Appeals (CA) in CA-G.R. CV No. 82758, which reversed and set aside the Decision 4 dated March 31, 2004
of the Regional Trial Court of Manila, Branch 34, in Civil Case No. 01-101885.

The facts as found by the CA, are as follows:

Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated Smelting and Refining
Corporation (PASAR) entered into a Contract of Affreightment for domestic bulk transport of the latter’s copper
concentrates for a period of one year from November 1, 1998 to October 31, 1999. The contract was extended up
to the end of October 2000.

On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates were loaded in Cargo Hold Nos.
1 and 2 of MV "Bobcat", a marine vessel owned by Loadstar International Shipping Co., Inc. (Loadstar
International) and operated by Loadstar Shipping under a charter party agreement. The shipper and consignee
under the Bill of Lading are Philex Mining Corporation (Philex) and PASAR, respectively. The cargo was insured
with Malayan Insurance Company, Inc. (Malayan) under Open Policy No. M/OP/2000/001-582. P & I Association is
the third party liability insurer of Loadstar Shipping.

On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San Fernando, La Union bound for
Isabel, Leyte. On September 12, 2000, while in the vicinity of Cresta de Gallo, the vessel’s chief officer on routine
inspection found a crack on starboard sideof the main deck which caused seawater to enter and wet the cargo
inside Cargo Hold No. 2 forward/aft. The cracks at the top deck starboard side of Cargo Hold No. 2, measuring
1.21 meters long x 0.39 meters wide, and at top deck aft section starboard side on other point, measuring 0.82
meters long x 0.32 meters wide, were welded.

Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September 13, 2000, PASAR and Philex’s
representatives boarded and inspected the vessel and undertook sampling of the copper concentrates. In its
preliminary report dated September 15, 2000, the Elite Adjusters and Surveyor, Inc. (Elite Surveyor) confirmed that
samples of copper concentrates from Cargo Hold No. 2 were contaminated by seawater. Consequently, PASAR
rejected 750 MT of the 2,300 MT cargo discharged from Cargo Hold No. 2.

On November 6, 2000, PASAR sent a formal notice of claim in the amount of [P]37,477,361.31 to Loadstar
Shipping. In its final report dated November 16, 2000, Elite Surveyor recommended payment to the assured the
amount of [P]32,351,102.32 as adjusted. On the basis of such recommendation, Malayan paid PASAR the amount
of [P]32,351,102.32.

Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the latter of a prospective buyer
for the damaged copper concentrates and the opportunity to nominate/refer other salvage buyers to PASAR. On
November 29, 2000, Malayan wrote Loadstar Shipping informing the latter of the acceptance of PASAR’s
Page 70 of 343
proposal to take the damaged copper concentrates at a residual value of US$90,000.00. On December 9, 2000,
Loadstar Shipping wrote Malayan requesting for the reversal of its decision to accept PASAR’s proposal and the
conduct of a public bidding to allow Loadstar Shipping to match or top PASAR’s bid by 10%.

On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To recover the amount paid and in
the exercise of its right of subrogation, Malayan demanded reimbursement from Loadstar Shipping, which
refused to comply. Consequently, on September 19, 2001, Malayan instituted with the RTC a complaint for
damages. The complaint was later amended to include Loadstar International as party defendant.

In its amended complaint, Malayan mainly alleged that as a direct and natural consequence of the
unseaworthiness of the vessel, PASAR suffered loss of the cargo. It prayed for the amount of [P]33,934,948.75,
representing actual damages plus legal interest fromdate of filing of the complaint until fully paid, and attorney’s
fees in the amount of not less than [P]500,000.00. It also sought to declare the bill of lading as void since it
violates the provisions of Articles 1734 and 1745 of the Civil Code.

On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer with counterclaim, denying
plaintiff appellant’s allegations and averring as follows: that they are not engaged in the business as common
carriers but as private carriers; that the vessel was seaworthy and defendants-appellees exercised the required
diligence under the law; that the entry of water into Cargo Hold No. 2 must have been caused by force majeureor
heavy weather; that due to the inherent nature of the cargo and the use of water in its production process, the
same cannot be considered damaged or contaminated; that defendants-appellees were denied reasonable
opportunity to participate in the salvage sale; that the claim had prescribed in accordance with the bill of lading
provisions and the Code of Commerce; that plaintiff-appellant’s claim is excessive, grossly overstated,
unreasonable and unsubstantiated; that their liability, if any, should not exceed the CIFvalue of the lost/damaged
cargo as set forth in the bill of lading, charter party or customary rules of trade; and that the arbitration clause in
the contract of affreightment should be followed.

After trial, and considering that the billof lading, which was marked as Exhibit "B", is unreadable, the RTC issued
on February 17, 2004 an order directing the counsel for Malayan to furnish it with a clearer copy of the same
within three (3) days from receipt of the order. On February 23, 2004, Malayan filed a compliance attaching
thereto copy of the bill of lading.

On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well as the counterclaim. The RTC
was convinced that the vessel was seaworthy at the time of loading and that the damage was attributable to the
perils of the sea (natural disaster) and not due to the fault or negligence of Loadstar Shipping.

The RTC found that although contaminated by seawater, the copper concentrates can still be used. Itgave
credence to the testimony of Francisco Esguerra, defendants-appellees’ expert witness, that despite high chlorine
content, the copper concentrates remain intact and will not lose their value. The gold and silver remain with the
grains/concentrates even if soaked with seawater and does not melt. The RTC observed that the purchase
agreement between PASAR and Philex contains a penalty clause and has no rejection clause. Despite this
agreement, the parties failed to sit down and assess the penalty.

The RTC also found that defendants-appellees were not afforded the opportunity to object or participate or
nominate a participant in the sale of the contaminated copper concentrates to lessen the damages to be paid. No
record was presented to show that a public bidding was conducted. Malayan sold the contaminated copper
concentrates to PASAR at a low price then paid PASAR the total value of the damaged concentrate without
deducting anything from the claim.

Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack of basis because what was
attached to Malayan’s compliance was still an unreadable machine copy thereof. 5 (Citations omitted)

Ruling of the CA

Page 71 of 343
On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which reads: WHEREFORE, the appeal
is GRANTED. The Decision dated March 31, 2004 of the RTC, Branch 34, Manila in Civil Case No. 01-101885, is
REVERSED and SET ASIDE. In lieu thereof, a new judgment is entered, ORDERING defendants-appellees to pay
plaintiff-appellant ₱33,934,948.75 as actual damages, plus legal interest at 6% annually from the date of the trial
court’s decision. Upon the finality of the decision, the total amount of the judgment shall earn annual interest at
12% until full payment.

SO ORDERED.7

On December 11, 2008, the CA modified the above decision through a Resolution, 8 the fallo thereof states:

WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision of this Court dated April 14, 2008
is PARTIALLY RECONSIDERED and MODIFIED. Defendants-appellees are ORDERED to pay to plaintiff-appellant
₱33,934,948.74 as actual damages, less US$90,000.00, computed at the exchange rate prevailing on November
29, 2000, plus legal interest at 6% annually from the date of the trial court’s decision. Upon the finality of the
decision, the total amount of the judgment shall earn annual interest at 12% until full payment.

SO ORDERED.9

The CA discussed that the amount of US$90,000.00 should have been deducted from Malayan’s claim against the
petitioners in order to prevent undue enrichment on the part of Malayan. Otherwise, Malayan would recover
from the petitioners not merely the entire amount of 33,934,948.74 as actual damages, but would also end up
unjustly enriching itself in the amount of US$90,000.00 – the residual value of the subject copper concentrates it
sold to Philippine Associated Smelting and Refining Corporation (PASAR) on November 29, 2000. 10 Issues

In sum, the grounds presented by the petitioners for the Court’s consideration are the following:

I.

THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT. THERE IS NOTHING IN THE
DECISION OF THE HONORABLE COURT THAT REVERSED THE FACTUAL FINDINGS AND CONCLUSIONS OF THE
TRIAL COURT, THAT THERE WAS NO ACTUAL LOSS OR DAMAGE TO THE CARGO OF COPPER CONCENTRATES
WHICH WOULD MAKE LOADSTAR AS THE SHIPOWNER LIABLE FOR A CARGO CLAIM. CONSEQUENTLY, THERE
IS NO BASIS FOR THE COURT TO ORDER LOADSTAR TO PAY ACTUAL DAMAGES IN THE AMOUNT OF PH₱33
MILLION.11

II.

M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS IN RULING THAT IT IS A
COMMON CARRIER. THE DECISION OF THE TRIAL COURT IS BEREFT OF ANY CATEGORICAL FINDING THAT M/V
BOBCAT IS A COMMON CARRIER.12

III.

THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT RESPONDENT’S
PAYMENT TO PASAR, ON THE BASIS OF THE LATTER’S FRAUDULENT CLAIM, ENTITLED RESPONDENT
AUTOMATIC RIGHT OF RECOVERY BY VIRTUE OF SUBROGATION. 13

Ruling of the Court

I. Proof of actual damages

It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point, La Union to Isabel, Leyte
were indeed contaminated with seawater. The issue lies on whether such contamination resulted to damage, and
the costs thereof, if any,incurred by the insured PASAR.
Page 72 of 343
The petitioners argued that the copper concentrates, despite being dampened with seawater, is neither subject to
penalty nor rejection. Under the Philex Mining Corporation (Philex)-PASAR Purchase Contract Agreement, there is
no rejection clause. Instead, there is a pre-agreed formula for the imposition of penalty in case other elements
exceeding the provided minimum level would be found on the concentrates. 14 Since the chlorine content on the
copper concentrates is still below the minimum level provided under the Philex-PASAR purchase contract, no
penalty may be imposed against the petitioners. 15

Malayan opposed the petitioners’ invocation of the Philex-PASAR purchase agreement, stating that the contract
involved in this case is a contract of affreightment between the petitioners and PASAR, not the agreement
between Philex and PASAR, which was a contract for the sale of copper concentrates. 16

On this score, the Court agrees withMalayan that contrary to the trial court’s disquisition, the petitioners cannot
validly invoke the penalty clause under the Philex-PASAR purchase agreement, where penalties are to be
imposed by the buyer PASAR against the seller Philex if some elements exceeding the agreed limitations are
found on the copper concentrates upon delivery. The petitioners are not privy tothe contract of sale of the
copper concentrates. The contract between PASAR and the petitioners is a contract of carriage of goods and not
a contract of sale. Therefore, the petitioners and PASAR are bound by the laws on transportation of goods and
their contract of affreightment. Since the Contract of Affreightment 17 between the petitioners and PASAR is silent
as regards the computation of damages, whereas the bill of lading presented before the trial court is
undecipherable, the New Civil Code and the Code ofCommerce shall govern the contract between the parties.

Malayan paid PASAR the amount of 32,351,102.32 covering the latter’s claim of damage to the cargo. 18 This is
based on the recommendation of Elite Adjustors and Surveyors, Inc. (Elite) which both Malayan and PASAR
agreed to. The computation of Elite is presented as follows:

Computation of Loss Payable.We computed for the insured value of the loss and loss payable, based on the
following pertinent data:

1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note and B/L) 4,568.907 dry
metric tons

2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)

3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. & 696.336 dry metric tons
discharge & sampling Cert.dated September 21, 2000)

Computation:

Total sum insured x Qty. damaged= Insured value of damage

Total Qty. in DMT (DMT) (DMT)

[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32

4,568.907 DMT

Insured value of damage = [P] 32,315,312.32 19

Based on the preceding computation, the sum of ₱32,315,312.32 represents damages for the total loss ofthat
portion of the cargo which were contaminated with seawater and not merely the depreciation in its value.
Strangely though, after claiming damages for the total loss of that portion, PASAR bought back the contaminated
copper concentrates from Malayan at the price of US$90,000.00. The fact of repurchase is enough to conclude
that the contamination of the copper concentrates cannot be considered as total loss on the part of PASAR.

Page 73 of 343
The following provisions of the Code of Commerce state how damages on goods delivered by the carrier should
be appraised:

Article 361. The merchandise shall be transported at the risk and venture of the shipper, if the contrary has not
been expressly stipulated. As a consequence, all the losses and deteriorations which the goods may suffer during
the transportation by reason of fortuitous event, force majeure, or the inherent nature and defect of the goods,
shall be for the account and risk of the shipper. Proof of these accidents is incumbent upon the carrier.

Article 362. Nevertheless, the carrier shall be liable for the losses and damages resulting from the causes
mentioned in the preceding article if it is proved, as against him, that they arose through his negligence or by
reason of his having failed to take the precautions which usage has established among careful persons, unless the
shipper has committed fraud in the bill of lading, representing the goods to be of a kind or quality different from
what they really were.

If, notwithstanding the precautions referred to in this article, the goods transported run the risk of being lost, on
account of their nature or by reason of unavoidable accident, there being no time for their owners to dispose of
them, the carrier may proceed to sell them, placing them for this purpose at the disposal of the judicial authority
or of the officials designated by special provisions.

xxxx

Article 364. If the effect of the damage referred to in Article 361 is merely a diminution in the value of the goods,
the obligation of the carrier shall be reduced to the payment of the amount which, in the judgment of experts,
constitutes such difference in value.

Article 365. If, in consequence of the damage, the goods are rendered useless for sale and consumption for the
purposes for which they are properly destined, the consignee shall not be bound to receive them, and he may
have them in the hands of the carrier, demanding of the latter their value at the current price on that day.

If among the damaged goods there should be some pieces in good condition and without any defect, the
foregoing provision shall be applicable with respect to those damaged and the consignee shall receive those
which are sound, this segregation to be made by distinct and separate pieces and without dividing a single
object, unless the consignee proves the impossibility of conveniently making use of them in this form.

The same rule shall be applied to merchandise in bales or packages, separating those parcels which appear
sound.

From the above-cited provisions, if the goods are delivered but arrived at the destination in damaged condition,
the remedies to be pursued by the consignee depend on the extent of damage on the goods.

If the goods are rendered useless for sale, consumption or for the intended purpose, the consignee may reject
the goods and demand the payment of such goods at their marketprice on that day pursuant to Article 365. In
case the damaged portion of the goods can be segregated from those delivered in good condition, the
consignee may reject those in damaged condition and accept merely those which are in good condition. But if
the consignee is able to prove that it is impossible to use those goods which were delivered in good condition
without the others, then the entire shipment may be rejected. To reiterate, under Article 365, the nature of
damage must be such that the goods are rendered useless for sale, consumption or intended purpose for the
consignee to be able to validly reject them.

If the effect of damage on the goods consisted merely of diminution in value, the carrier is bound to pay only the
difference between its price on that day and its depreciated value as provided under Article 364.

Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered useless or unfit for the
purpose intended by PASAR due to contamination with seawater. Hence, there is no basis for the goods’ rejection
under Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan to reimburse PASAR as though
Page 74 of 343
the latter suffered from total loss of goods in the absence of proof that PASAR sustained such kind of loss.
Otherwise, there will be no difference inthe indemnification of goods which were not delivered at all; or delivered
but rendered useless, compared against those which were delivered albeit, there is diminution in value.

Malayan also failed to establish the legal basis of its decision to sell back the rejected copper concentrates to
PASAR. It cannot be ascertained how and when Malayan deemed itself asthe owner of the rejected copper
concentrates to have these validly disposed of. If the goods were rejected, it only means there was no acceptance
on the part of PASAR from the carrier. Furthermore, PASAR and Malayan simply agreed on the purchase price of
US$90,000.00 without any allegation or proof that the said price was the depreciated value based on the
appraisal of experts as provided under Article 364 of the Code of Commerce.

II. Subrogation of Malayan to the rights of PASAR

Malayan’s claim against the petitioners is based on subrogation to the rights possessed by PASAR as consignee
of the allegedly damaged goods. The right of subrogation stems from Article 2207 of the New Civil Code which
states:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall
be subrogated to the rights of the insured against the wrong doer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.

"The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by the insurer." 20 The right of
subrogation is however, not absolute. "There are a few recognized exceptions to this rule. For instance, if the
assured by his own act releases the wrongdoer or third party liable for the loss or damage, from liability, the
insurer’s right of subrogation is defeated. x x x Similarly, where the insurer pays the assured the value of the
lostgoods without notifying the carrier who has in good faith settled the assured’s claim for loss, the settlement is
binding on both the assured and the insurer, and the latter cannot bring an action against the carrier on his right
of subrogation. x x x And where the insurer pays the assured for a loss which is not a risk covered by the policy,
thereby effecting ‘voluntary payment,’ the former has no right of subrogation against the third party liable for the
loss x x x."21

The rights of a subrogee cannot be superior to the rights possessed by a subrogor. "Subrogation is the
substitution of one person in the place of another with reference to a lawful claim or right, so that he who is
substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities.
The rights to which the subrogee succeeds are the same as, but not greaterthan, those of the person for whom
he is substituted, that is, he cannot acquire any claim, security or remedy the subrogor did not have. In other
words, a subrogee cannot succeed to a right not possessed by the subrogor. A subrogee in effect steps into the
shoes of the insured and can recover only ifthe insured likewise could have recovered." 22 Consequently, an insurer
indemnifies the insured based on the loss or injury the latter actually suffered from. If there is no loss or injury,
then there is no obligation on the part of the insurer to indemnify the insured. Should the insurer pay the insured
and it turns out that indemnification is not due, or if due, the amount paid is excessive, the insurer takes the risk
of not being able to seek recompense from the alleged wrongdoer. This is because the supposed subrogor did
not possessthe right to be indemnified and therefore, no right to collect is passed on to the subrogee. As regards
the determination of actual damages, "[i]t is axiomatic that actual damages must be proved with reasonable
degree of certainty and a party is entitled only to such compensation for the pecuniary loss that was duly
proven."23 Article 2199 of the New Civil Code speaks of how actual damages are awarded:

Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or
compensatory damages.

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Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount of US$90,000.00 fromthe
award, the same is still iniquitous for the petitioners because PASAR and Malayan never proved the actual
damages sustained by PASAR. It is a flawed notion to merely accept that the salvage value of the goods is
US$90,000.00, since the price was arbitrarily fixed between PASAR and Malayan. Actual damages to PASAR, for
example, could include the diminution in value as appraised by experts or the expenses which PASAR incurred for
the restoration of the copper concentrates to its former condition, ifthere is damage and rectification is still
possible.

It is also note worthy that when the expert witness for the petitioners, Engineer Francisco Esguerra (Esguerra),
testified as regards the lack of any adverse effect of seawater on copper concentrates, Malayan never presented
evidence of its own in refutation to Esguerra’s testimony. And, even if the Court will disregard the entirety of his
testimony, the effect on Malayan’s cause of action is nil. As Malayan is claiming for actual damages, it bears the
burden of proof to substantiate its claim.

"The burden of proof is on the party who would be defeated if no evidence would be presented on either side.
The burden is to establish one’s case by a preponderance of evidence which means that the evidence, as a whole,
adduced by one side, is superior tothat of the other. Actual damages are not presumed. The claimant must prove
the actual amount of loss with a reasonable degree of certainty premised upon competent proof and on the best
evidence obtainable. Specific facts that could afford a basis for measuring whatever compensatory or actual
damages are borne must be pointed out. Actual damages cannot be anchored on mere surmises, speculations or
conjectures."24

Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which the latter was questionably
indemnified, there is no necessity to expound further on the other issues raised by the petitioners and Malayan in
this case.

WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and Resolution dated December 11,
2008 of the Court of Appeals in CA-G.R. CV No. 82758 are hereby REVERSED and SET ASIDE. The Decision dated
March 31, 2004 of the Regional Trial Comi of Manila, Branch 34 in Civil Case No·. 01-101885 is REINSTATED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

TRANSPORATION LAW

G.R. No. 187701 July 23, 2014

PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES INSURANCE, INC.*), Petitioner,
vs.
HEUNG-A SHIPPING CORPORATION and WALLEM PHILIPPINES SHIPPING, INC., Respondents.

x-----------------------x

G.R. No. 187812

HEUNG-A SHIPPING CORPORATION and WALLEM PHILIPPINES SHIPPING, INC., Petitioners,

vs.
PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES INSURANCE, INC.), Respondent.

DECISION

REYES, J.:

Page 76 of 343
At bar are consolidated petitions for review on certiorari 1 under Rule 45 of the Rules of Court assailing the
Decision2dated January 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 89482 affirming with
modifications the Decision3 dated February 26, 2007 of the Regional Trial Court (RTC) of Makati City, Branch 148,
in Civil Case No. 01-889.

The Factual Antecedents

On December 19, 2000, Novartis Consumer Health Philippines, Inc. (NOVARTIS) imported from Jinsuk Trading Co.
Ltd., (JINSUK) in South Korea, 19 pallets of 200 rolls of Ovaltine Power 18 Glaminated plastic packaging material.

In order to ship the goods to the Philippines, JINSUK engaged the services of Protop Shipping Corporation
(PROTOP), a freight forwarder likewise based in South Korea, to forward the goods to their consignee, NOVARTIS.

Based on Bill of Lading No. PROTAS 200387 issued by PROTOP, the cargo was on freight prepaid basis and on
"shipper’s load and count" which means that the "container [was] packed with cargo by one shipper where the
quantity, description and condition of the cargo is the sole responsibility of the shipper." 4 Likewise stated in the
bill of lading is the name Sagawa Express Phils., Inc., (SAGAWA) designated as the entity in the Philippines which
will obtain the delivery contract.

PROTOP shipped the cargo through Dongnama Shipping Co. Ltd. (DONGNAMA) which in turn loaded the same
on M/V Heung-A Bangkok V-019 owned and operated by Heung-A Shipping Corporation, (HEUNG-A), a Korean
corporation, pursuant to a ‘slot charter agreement’ whereby a space in the latter’s vessel was reserved for the
exclusive use of the former. Wallem Philippines Shipping, Inc. (WALLEM) is the ship agent of HEUNG-A in the
Philippines. NOVARTIS insured the shipment with Philam Insurance Company, Inc. (PHILAM, now Chartis
Philippines Insurance, Inc.) under All Risk Marine Open Insurance Policy No. MOP-0801011828 against all loss,
damage, liability, or expense before, during transit and even after the discharge of the shipment from the
carrying vessel until its complete delivery to the consignee’s premises. The vessel arrived at the port ofManila,
South Harbor, on December 27, 2000 and the subject shipment contained in Sea Van Container No. DNAU
420280-9 was discharged without exception into the possession, custody and care of Asian Terminals, Inc. (ATI)
as the customs arrastre operator.

The shipment was thereafter withdrawn on January 4, 2001, by NOVARTIS’ appointed broker, Stephanie Customs
Brokerage Corporation (STEPHANIE) from ATI’s container yard.

The shipment reached NOVARTIS’ premises on January 5, 2001 and was thereupon inspected by the company’s
Senior Laboratory Technician, Annie Rose Caparoso (Caparoso). 5

Upon initial inspection, Caparoso found the container van locked with its load intact. After opening the same, she
inspected its contents and discovered that the boxes of the shipment were wet and damp. The boxes on one side
of the van were in disarray while others were opened or damaged due to the dampness. Caparoso further
observed that parts of the container van were damaged and rusty. There were also water droplets on the walls
and the floor was wet. Since the damaged packaging materials might contaminate the product they were meant
to hold, Caparoso rejected the entire shipment.

Renato Layug and Mario Chin, duly certified adjusters of the Manila Adjusters and Surveyors Company
wereforthwith hailed to inspect and conduct a survey of the shipment. 6 Their Certificate of Survey7 dated January
17, 2001 yielded results similar to the observations of Caparoso, thus:

[T]he sea van panels/sidings and roofing were noted with varying degrees of indentations and partly
corroded/rusty. Internally, water bead clung along the roofs from rear to front section. The mid section
dented/sagged with affected area was noted withminutes hole evidently due to thinning/corroded rusty metal
plates. The shipment was noted with several palletized cartons already in collapsed condition due to wetting. The
van’s entire floor length was also observed wet. 8

Page 77 of 343
All 17 pallets of the 184 cartons/rolls contained in the sea van were found wet/water damaged. Sixteen
(16)cartons/rolls supposedly contained in 2 pallets were unaccounted for although the surveyors remarked that
this may be due to short shipment by the supplier considering that the sea van was fully loaded and can no
longer accommodate the said unaccounted items. The survey report further stated that the "wetting sustained by
the shipment may have reasonably be attributed to the water seepage that gain entry into the sea van container
damageroofs (minutes hole) during transit period[sic]." 9

Samples from the wet packing materials/boxes were submitted to the chemist of Precision Analytical Services, Inc.
(PRECISION), Virgin Hernandez (Hernandez), and per Laboratory Report No. 042-07 dated January 16, 2001, the
cause of wetting in the carton boxes and kraft paper/lining materials as well as the aluminum foil laminated
plastic packaging material, was salt water.10

Aggrieved, NOVARTIS demanded indemnification for the lost/damaged shipment from PROTOP, SAGAWA, ATI
and STEPHANIE but was denied. Insurance claims were, thus, filed with PHILAM which paid the insured value of
the shipment inthe adjusted amount of One Million Nine Hundred Four Thousand Six Hundred Thirteen Pesos
and Twenty Centavos (₱1,904,613.20). Claiming that after such payment, it was subrogated to all the rights and
claims of NOVARTIS against the parties liable for the lost/damaged shipment, PHILAM filed on June 4, 2001, a
complaint for damages against PROTOP, as the issuer of Bill of Lading No. PROTAS 200387, its ship agent in the
Philippines, SAGAWA, consignee, ATI and the broker, STEPHANIE.

On October 12, 2001, PHILAM sent a demand letter to WALLEM for reimbursement of the insurance claims paid
to NOVARTIS.11 When WALLEM ignored the demand, PHILAM impleaded it as additional defendant in an
Amended Complaint duly admitted by the trial court on October 19, 2001. 12

On December 11, 2001, PHILAM filed a Motion to Admit Second Amended Complaint this time designating
PROTOP as the owner/operator of M/V Heung-A Bangkok V-019 and adding HEUNG-A as party defendant for
being the registered owner of the vessel. 13 The motion was granted and the second amended complaint was
admitted by the trial court on December 14, 2001.14

PROTOP, SAGAWA, ATI, STEPHANIE, WALLEM and HEUNG-A denied liability for the lost/damaged shipment.

SAGAWA refuted the allegation that it is the ship agent of PROTOP and argued that a ship agent represents the
owner of the vessel and not a mere freight forwarder like PROTOP. SAGAWA averred that its only role with
respect to the shipment was to inform NOVARTIS of its arrival in the Philippines and to facilitate the surrender of
the original bill of lading issued by PROTOP.

SAGAWA further remarked that it was deprived an opportunity to examine and investigate the nature and extent
of the damage while the matter was still fresh so as tosafeguard itself from false/fraudulent claims because
NOVARTIS failed totimely give notice about the loss/damage. 15

SAGAWA admitted that it has a non-exclusive agency agreement with PROTOP to serve as the latter’s delivery
contact person in the Philippines with respect to the subject shipment. SAGAWA is also a freight forwarding
company and that PROTOPwas not charged any fee for the services rendered by SAGAWA with respect to the
subject shipment and instead the latter was given US$10 as commission. 16 For having been dragged into court on
a baseless cause, SAGAWA counterclaimed for damages in the form of attorney’s fees.

ATI likewise interposed a counterclaim for damages against PHILAM for its allegedly baseless complaint. ATI
averred that it exercised due care and diligence in handling the subject container. Also, NOVARTIS, through
PHILAM, is now barred from filing any claim for indemnification because the latter failed to file the same within 15
days from receipt of the shipment.17 Meanwhile, STEPHANIE asserted that its only role with respect to the
shipment was its physical retrieval from ATI and thereafter its delivery to NOVARTIS. That entire time, the sealwas
intact and not broken. Also, based on the Certificate of Survey, the damage to the shipment was due to salt water
which means that it could not have occurred while STEPHANIE was in possession thereof during its delivery from
ATI’s container yard to NOVARTIS’ premises. STEPHANIE counterclaimed for moral damages and attorney’s fees.18

Page 78 of 343
WALLEM alleged that the damageand shortages in the shipment were the responsibility of the shipper, JINSUK,
because it was taken on board on a "shipper’s load and count" basis which means that it was the shipper that
packed, contained and stuffed the shipment in the container van without the carrier’s participation. The container
van was already sealed when it was loadedon the vessel and hence, the carrier was in no position to verify the
condition and other particulars of the shipment.

WALLEM also asserted that the shipment was opened long after it was discharged from the vessel and that
WALLEM or HEUNG-A were not present during the inspection, examination and survey.

WALLEM pointed the blame to PROTOP because its obligation to the shipper as freight forwarder carried the
concomitant responsibility of ensuring the shipment’s safety from the port of loading until the final place of
delivery. WALLEM claimed to haveexercised due care and diligence in handling the shipment.

In the alternative, WALLEM averred that any liability which may be imputed to it is limited only to US$8,500.00
pursuant to the Carriage of Goods by Sea Act (COGSA). 19

HEUNG-A argued that it is not the carrier insofar as NOVARTIS is concerned. The carrier was either PROTOP, a
freight forwarder considered as a non-vessel operating common carrier or DONGNAMA which provided the
container van to PROTOP.20 HEUNG-A denied being the carrier of the subjectshipment and asserted that its only
obligation was to provide DONGNAMA a space on board M/V Heung-A Bangkok V-019.

PROTOP failed to file an answer to the complaint despite having been effectively served with alias summons. It
was declared in default in the RTC Order dated June 6, 2002. 21

Ruling of the RTC

In a Decision22 dated February 26, 2007, the RTC ruled that the damage to the shipment occurred onboard the
vessel while in transit from Korea to the Philippines.

HEUNG-A was adjudged as the common carrier of the subject shipment by virtue of the admissions of WALLEM’s
witness, Ronald Gonzales (Gonzales) that despite the slot charter agreement with DONGNAMA, it was still the
obligation of HEUNG-A to transport the cargo from Busan, Korea to Manila and thus any damage to the
shipment is the responsibility of the carrier to the consignee.

The RTC further observed that HEUNG-A failed to present evidence showing that it exercised the diligence
required of a common carrier in ensuring the safety of the shipment.

The RTC discounted the slot charter agreement between HEUNG-A and DONGNAMA, and held that it did not
bind the consignee who was not a party thereto. Further, it was HEUNG-A’s duty to ensure that the container van
was in good condition by taking an initiative to state in its contract and demand from the owner of the container
van that it should be in a good condition all the time. Such initiative cannot be shifted to the shipper because it is
in no position to demand the same from the owner of the container van.

WALLEM was held liable as HEUNG-A’s ship agent in the Philippines while PROTOP was adjudged liable because
the damage sustained by the shipment was due to the bad condition of the container van. Also, based on the
statement at the backof the bill of lading, it assumed responsibility for loss and damage as freight forwarder, viz:

6.1 The responsibility of the Freight Forwarder for the goods under these conditions covers the period from the
time the Freight Forwarder has taken the goods in his charge to the time of the delivery.

6.2 The Freight Forwarde[r] shall beliable for loss or damage to the goods as well as for delay in delivery if the
occurrence which caused the loss, damage, delay in delivery took place while the goods were in his charge as
defined in clause 2.1.a unless the Freight Forwarder proves that no fault or neglect of his own servants or agents
or any other person referred to in Clause 2.2 has caused or contributed to such loss, damage or delay. However,
the Freight Forwarder shall only be liable for loss following from delay in delivery if the Consignor has made a
Page 79 of 343
declaration of interest in timely delivery which has been accepted by the Freight Forwarder and stated in this
FBL.23

PHILAM was declared to havebeen validly subrogated in NOVARTIS’ stead and thus entitled to recover the
insurance claims it paid to the latter.

ATI and STEPHANIE were exonerated from any liability. SAGAWA was likewise adjudged not liable for the
loss/damage to the shipment by virtue of the phrase "Shipper’s Load and Count" reflected in the bill of lading
issued by PROTOP. Since the container van was packed under the sole responsibility of the shipper in Korea,
SAGAWA, which is based in the Philippines, had no chance to check if the contents were in good condition or
not. The RTC concluded that SAGAWA cannot be expected to observe the diligence or care required of a carrier
or ship agent. SAGAWA, ATI and STEPHANIE’s counterclaims for attorney’s fees were granted and PHILAM was
ordered to pay the same for having been filed a ‘shotgun case’ against them. Accordingly, the dispositive portion
of the RTC decision read:

WHEREFORE, premises considered, judgment is hereby rendered declaring defendants PROTOP SHIPPING
CORPORATION, HEUNG-A SHIPPING CORPORATION and WALLEM PHILIPPINES SHIPPING, INC. solidarily liable
to pay x x x PHILAM INSURANCE COMPANY, INC. the following amounts:

1. [P]1,904,613.20 plus interest of 12% per annum from December 26, 2001 (date of service of summons to
defendant Heung-A) until full payment;

2. [P]350,000.00 as attorney’s fees; and 3. Cost of suit.

With regards to the counter claims, x x x PHILAM INSURANCE COMPANY, INC. is hereby ordered to pay
defendants SAGAWA EXPRESS PHILIPPINES, INC., ASIAN TERMINALS, INC., and STEPHANIE CUSTOMS
BROKERAGE CORPORATION the amount of [P]100,000.00 each as attorney’s fees.

SO ORDERED.24

Ruling of the CA

An appeal to the CA was interposed by PHILAM, WALLEM and HEUNG-A. In a Decision25 dated January 30, 2009,
the CA agreed with the RTC that PROTOP, HEUNG-A and WALLEM are liable for the damaged shipment. The fact
that HEUNG-A was not a party to the bill of lading did not negate the existence of a contract of carriage between
HEUNG-A and/or WALLEM and NOVARTIS. A bill of lading is not indispensable for the creation of a contract of
carriage. By agreeing to transport the goods contained in the sea van providedby DONGNAMA, HEUNG-A
impliedly entered into a contract of carriage with NOVARTIS with whom the goods were consigned. Hence, it
assumed the obligations of a common carrier to observe extraordinary diligence in the vigilance over the goods
transported by it. Further the Slot Charter Agreement did not change HEUNG-A’s character as a common carrier.

Moreover, the proximate cause ofthe damage was the failure of HEUNG-A to inspect and examine the actual
condition of the sea van before loading it on the vessel. Also, propermeasures in handling and stowage should
have been adopted to prevent seepage of sea water into the sea van.

The CA rejected WALLEM and HEUNG-A’s argument that NOVARTIS failed to comply with Article 366 of the
Code of Commerce requiring that a claim must be made against the carrier within 24 hours from receipt of the
merchandise because such provision applies only to inter-island shipments within the Philippines.

The CA limited the liability of PROTOP, WALLEM and HEUNG-A to US$8,500.00 pursuant to the liability limitation
under the COGSA since the shipper failed to declare the value of the subject cargo in the bill of lading and since
they could not be made answerable for the two (2) unaccounted pallets because the shipment was on a
"shipper’s load, count and seal" basis.

Page 80 of 343
The attorney’s fees awarded to SAGAWA, ATI and STEPHANIE were deleted because it was not shown that
PHILAM was motivated by malice and bad faith in impleading them as defendants. Thus, the CA decision was
disposed as follows:

WHEREFORE, premises considered, the appealed Decision is hereby AFFIRMED with MODIFICATION.Defendants
PROTOP SHIPPING CORPORATION, HEUNG-A SHIPPING CORPORATION [and] WALLEM PHILIPPINES
SHIPPING,INC.’s solidary liability to PHILAM INSURANCE COMPANY, INC. is reduced to $8,500.00 plus interest
per annum from26 December 2001 (date ofservice of summons to defendant Heung-A) until full payment. The
award of attorney’s fees in the amount of One Hundred Thousand Pesos ([P]100,000.[00]) each to SAGAWA
EXPRESS PHILIPPINES, INC., ASIAN TERMINALS, INC. and STEPHANIE CUSTOMS BROKERAGE is hereby DELETED.

SO ORDERED.26

The foregoing judgment was reiterated in the CA Resolution27 dated May 8, 2009 which denied the motions for
reconsideration filed by PHILAM, WALLEM and HEUNG-A.

PHILAM thereafter filed a petition for review before the Court docketed as G.R. No. 187701. WALLEM and
HEUNG-A followed suit and their petition was docketed as G.R. No. 187812. Considering that both petitions
involved similar parties and issue, emanated from the same Civil Case No. 01-889 and assailed the same CA
judgment, they were ordered consolidated in a Resolution 28 dated January 13, 2010.

In G.R. No. 187701, PHILAM raised the following grounds:

THE HONORABLE [CA] COMMITTED SERIOUS ERROR WHEN IT RULED IN ITS DECISION OF 30 JANUARY 2009
THAT [HEUNG-A and WALLEM] HAVE THE RIGHT TO LIMIT THEIR LIABILITY UNDER THE PACKAGE LIMITATION
OF LIABILITY OF SECTION 4(5) OF THE CARRIAGE OF GOODS BY SEA ACT, 1924, IN VIEW OF ITS OBSERVATION
THAT [NOWHERE] IN THE BILL OF LADING DID THE SHIPPER DECLARE THE VALUE OF THE SUBJECT CARGO;

THE HONORABLE [CA] COMMITTED SERIOUS ERROR WHEN IT COMPLETELY DISREGARDED THE
FUNDAMENTAL BREACHES OF [HEUNG-A and WALLEM] OF [THEIR] OBLIGATIONS AND RESPONSIBILITIES
UNDER THE CONTRACT OF CARRIAGE AND LAW OF THE CASE AS LEGAL GROUNDS TO PRECLUDE ITS
AVAILMENT OF THE PACKAGE LIMITATION OF LIABILITY UNDER SECTION 4(5) OF THE CARRIAGE OF GOODS BY
SEA ACT, 1924.29

In G.R. No. 187812, HEUNG-A and WALLEM argued that:

THE [CA] COMMITTED A SERIOUS ERROR OF LAW IN RULING THAT THE CODE OFCOMMERCE, SPECIFICALLY
ARTICLE 366 THEREOF, DOES NOT APPLY IN THIS CASE[;]

THE [CA] COMMITTED A SERIOUS ERROR OF LAW IN RULING THAT THE SO-CALLED "PARAMOUNT CLAUSE" IN
THE BILL OF LADING, WHICH PROVIDED THAT "COGSA" SHALL GOVERN THE TRANSACTION, RESULTED IN THE
EXCLUSION OR INAPPLICABILITY OF THE CODE OF COMMERCE[;]

THE [CA] COMMITTED A SERIOUS ERROR OF LAW IN NOT RULING THAT [PHILAM] HAS NO RIGHT OF ACTION
AGAINST [HEUNG-A and WALLEM] INSOFAR AS DAMAGE TO CARGO IS CONCERNED IN VIEW OF THE FACT
THAT NO TIMELY CLAIM WAS FILED PURSUANT TO ARTICLE 366 OF THE CODE OF COMMERCE OR THE
PROVISIONS OF THE BILL OF LADING NO.DNALGOBUM 005019[;]

THE [CA] GRAVELY ABUSED ITS DISCRETION AMOUNTING TO EXCESS OR LACK OF JURISDICTION IN FINDING
THAT THE CONTAINERIZED CARGO WAS DAMAGED WHILE IN THE POSSESSION OR CUSTODY OF THE VESSEL
"HEUNG-A BANGKOK".30

Issues

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The arguments proffered by the parties can be summed up into the following issues: (1) Whether the shipment
sustained damage while in the possession and custody of HEUNG-A, and if so, whether HEUNG-A’s liability can
be limited to US$500 per package pursuant tothe COGSA; (2) Whether or not NOVARTIS/PHILAM failed to file a
timely claim against HEUNG-A and/or WALLEM.

Ruling of the Court

It must be stressed that the question on whether the subject shipment sustained damaged while in the
possession and custody of HEUNG-A is a factual matter which has already beendetermined by the RTC and the
CA. The courts a quowere uniform in finding that the goods inside the container van were damaged by sea water
whilein transit on board HEUNG-A’s vessel.

Being a factual question, it is notreviewable in the herein petition filed under Rule 45 of the Rules of Court. It isnot
the Court’s duty to evaluate and weigh the evidence all over again as such function is conceded to be within the
expertise of the trial court whose findings, when supported by substantial evidence on record and affirmed by the
CA, are regarded with respect, if not binding effect, by this Court. 31

There are certain instances, however, when the Court is compelled to deviate from this rule, dismantle the factual
findings of the courts a quoand conduct a probe into the factual questions at issue. These circumstances are: (1)
the inference made ismanifestly mistaken, absurd or impossible; (2) there is grave abuse of discretion; (3) the
findings are grounded entirely on speculations, surmises or conjectures; (4) the judgment of the CA is based on
misapprehension of facts; (5) the CA, in making its findings, went beyond the issues of the case and the same is
contrary to the admissions of both appellant and appellee; (6) the findings of fact are conclusions without citation
of specific evidence on which theyare based; (7) the CA manifestly overlooked certain relevant facts not disputed
by the parties and which, if properly considered, would justify a different conclusion; and (8) the findings of fact of
the CA are premised on the absence ofevidence and are contradicted by the evidence on record. 32

None of the foregoing instances is extant from records of the present case. Instead, the Court finds that the
factual findings of the courts a quo are supported by evidence on record.

The uncontested results of the inspection survey conducted by Manila Adjusters Surveyors Company showed that
sea water seeped into the panels/sidings and roofing of the container van. This was confirmed by the
examination conducted by Hernandez, the chemist of PRECISION, on samples from the cartons, boxes, aluminum
foil and laminated plastic packaging materials. Based on the laboratory examination results, the contents of the
van were drenched by sea water, an element which is highly conspicuous in the high seas. It can thus be
reasonably concluded that negligence occurred while the container van was in transit, in HEUNG-A’s possession,
control and custody as the carrier.

Although the container van had defects, they were not, however, so severe as to accommodate heavy saturation
of sea water. The holes were tiny and the rusty portions did not cause gaps or tearing. Hence, the van was still in
a suitable condition to hold the goods and protect them from natural weather elements or even the normal
flutter of waves in the seas.

The scale of the damage sustained by the cargo inside the van could have been only caused by large volume of
sea water since not a single package inside was spared. Aside from the defective condition of the van, some other
circumstance or occurrence contributed to the damages sustained by the shipment. Since the presence of sea
water is highly concentrated in the high seas and considering HEUNG-A’s failure to demonstrate how it exercised
due diligence in handling and preserving the container van while in transit, it is liable for the damages sustained
thereby.

As the carrier of the subject shipment, HEUNG-A was bound to exercise extraordinary diligence in conveying the
same and its slot charter agreement with DONGNAMA did not divest it of such characterization nor relieve it of
any accountability for the shipment.

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Based on the testimony of Gonzales,33 WALLEM’s employee and witness, the charter party between HEUNG-A
and DONGNAMA was a contract of affreightment and not a bare boat or demise charter, viz:

Q: Now, the space charter that you are mentioning is not either a bareboat or a demise?

A: Yes, sir.

Q: Okay. So in other words, that space charter party is only to allow the shipper, Dongnama, to load its cargo for
a certain specified space?

A: Yes, sir.34

A charter party has been defined in Planters Products, Inc. v. Court of Appeals 35 as:

[A] contract by which an entire ship, orsome principal part thereof, is let by the owner to another person for a
specified time or use; a contract of affreightment by which the owner of a ship or other vessel lets the whole or a
part of her to a merchant or other person for the conveyance of goods, on a particular voyage, in consideration
of the payment of freight. x x x.36 (Citations omitted)

A charter party has two types. First, it could be a contract of affreightment whereby the use of shipping space on
vessels is leased in part or as a whole, to carry goods for others. The charter-party provides for the hire of vessel
only, either for a determinate period of time (time charter) or for a single or consecutive voyage (voyage charter).
The shipowner supplies the ship’s stores, pay for the wages ofthe master and the crew, and defray the expenses
for the maintenance of the ship.37 The voyage remains under the responsibility of the carrier and it is answerable
for the loss of goods received for transportation. The charterer is free from liability to third persons in respect of
the ship.38

Second, charter by demise or bareboat charter under which the whole vessel is let to the charterer with a transfer
to him of its entire command and possession and consequent control over its navigation, including the master
and the crew, who are his servants.39 The charterer mans the vessel with his own people and becomes, in effect,
the owner for the voyage or service stipulated and hence liable for damages or loss sustained by the goods
transported.40

Clearly then, despite its contract of affreightment with DONGNAMA, HEUNG-A remained responsible as the
carrier, hence, answerable for the damages incurred by the goods received for transportation. "[C]ommon
carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary
diligenceand vigilance with respect to the safety of the goods and the passengers they transport. Thus, common
carriers are required to render service with the greatest skill and foresight and ‘to use all reasonable means to
ascertain the nature and characteristics of the goods tendered for shipment, and toexercise due care in the
handling and stowage, including such methods as their nature requires.’" 41

"[C]ommon carriers, as a general rule, are presumed to have been at fault or negligent if the goods they
transported deteriorated or got lost or destroyed. That is, unless they provethat they exercised extraordinary
diligence in transporting the goods. Inorder to avoid responsibility for any loss or damage, therefore, they have
the burden of proving that they observed such diligence." 42 Further, under Article 1742 of the Civil Code, even if
the loss, destruction, or deterioration of the goods should be caused by the faulty nature of the containers, the
common carrier must exercise due diligence to forestall or lessen the loss.

Here, HEUNG-A failed to rebut this prima faciepresumption when it failed to give adequate explanation as to how
the shipment inside the container van was handled, stored and preserved to forestall or prevent any damage or
loss while the same was inits possession, custody and control.

PROTOP is solidarily liable with HEUNG-A for the lost/damaged shipment in view of the bill of lading the former
issued to NOVARTIS. "A bill of lading is a written acknowledgement of the receipt of goods and an agreement to
transport and to deliver them at a specified place to a person named or on his or her order. It operates both as a
Page 83 of 343
receipt and as a contract. It is a receipt for the goods shipped and a contract to transport and deliver the same as
therein stipulated."43 PROTOP breached its contract with NOVARTIS when it failed to deliver the goods in the
same quantity, quality and description as stated in Bill of Lading No. PROTAS 200387.

The CA did not err in applying the provisions of the COGSA specifically, the rule on Package Liability Limitation.

Under Article 1753 of the Civil Code, the law of the country to which the goods are to be transported shall govern
the liability of the common carrier for their loss, destruction or deterioration. Since the subject shipment was
being transported from South Korea to the Philippines, the Civil Code provisions shall apply. In all mattersnot
regulated by the Civil Code, the rights and obligations of common carriers shall be governed by the Code of
Commerce and by special laws,44 such as the COGSA.

While the Civil Code contains provisions making the common carrier liable for loss/damage to the goods
transported, it failed to outline the manner of determining the amount of suchliability. Article372 of the Code of
Commerce fills in this gap, thus:

Article 372. The value of the goods which the carrier must pay in cases if loss or misplacement shall be
determined in accordance with that declared in the bill of lading, the shipper not being allowed to present proof
that among the goods declared therein there were articles of greater value and money.

Horses, vehicles, vessels, equipment and all other principal and accessory means of transportation shall be
especially bound infavor of the shipper, although with respect to railroads said liability shall be subordinated to
the provisions of the laws of concession with respect to the property, and to what this Code established as to the
manner and form of effecting seizures and attachments against said companies. (Emphasis ours)

In case, however, of the shipper’s failure to declare the value of the goods in the bill of lading, Section 4,
paragraph 5 of the COGSA provides:

Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection
with the transportation of goods in an amount exceeding $500 per package lawful money of the United States, or
in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other
currency, unless the nature and value of such goods have been declared by the shipper before shipment and
inserted in the bill of lading. This declaration, if embodied in the bill of lading shall be prima facieevidence, but
shall be conclusive on the carrier.

Hence, when there is a loss/damage to goods covered by contracts of carriage from a foreign port to a Philippine
port and in the absence a shipper’s declaration of the value of the goods in the bill of lading, as in the present
case, the foregoing provisions of the COGSA shall apply. The CA, therefore, did not err in ruling that HEUNG-A,
WALLEM and PROTOP’s liability is limited to $500 per package or pallet.45

The Court likewise affirms the CA in pronouncing HEUNG-A, WALLEM and PROTOP liable only for the
lost/damaged 17 pallets instead of 19 pallets stated in the bill of lading. This is because, per the "Shipper’s Load
and Count" arrangement, the contents are not required to be checked and inventoried by the carrier at the port
of loading or before said carrier enters the port of unloading in the Philippines since it is the shipper who has the
sole responsibility for the quantity, description and condition of the cargoes shipped in container vans. 46 As such,
the carrier cannot be held responsible for any discrepancy if the description in the bill of lading is different from
the actual contents of the container.47

Consonant with the ruling in the recent Asian Terminals, Inc. v. Philam Insurance Co., Inc., 48 the prescriptive period
for filing an action for lost/damaged goods governed by contracts of carriage by sea to and from Philippine ports
in foreign trade is governed by paragraph 6,Section 3 of the COGSA which states:

(6) Unless notice of loss or damageand the general nature of such loss or damage be given in writing to the
carrier or his agent at the port of discharge before or at the time of the removal of the goods into the custody of
the person entitled to delivery thereof under the contract of carriage, such removal shall be prima facieevidence
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of the delivery by the carrier of the goods as described in the bill of lading. If the loss or damage is not apparent,
the notice must be given within three days of the delivery.

Said notice of loss or damage maybe endorsed upon the receipt for the goods given by the person taking
delivery thereof.

The notice in writing need not be given if the state of the goods has at the time of their receipt been the subject
of joint survey or inspection. In any event the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought withinone year after delivery of the goods or the date when the goods
should have been delivered: Provided, That if a notice of loss or damage, either apparent or concealed, is not
given as provided for in this section, that fact shall not affect or prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or the date when the goods should have been delivered.

It was further ruled in Asian Terminals that pursuant to the foregoing COGSA prov:sion, failure to comply with the
notice requirement shall not affect or prejudice the right of the shipper to bring suit within one year after delivery
of the goods.

The consignee, NOV ARTIS, received the subject shipment on January 5, 2001. PHILAM, as the subrogee of
NOVARTIS, filed a claim against PROTOP on June 4, 2001, against WALLEM on October 12, 2001 and against
HEUNG-A on December 11, 2001, or all within the one-year prescriptive period. Verily then, despite NOV AR TIS'
failure to comply with the three-day notice requirement, its subrogee PHILAM is not barred from seeking
reimbursement from PROTOP, HEUNG-A and WALLEM because the demands for payment were timely filed.

The amount which PHILAM is entitled to receive shall earn a legal interest at the rate of six percent (6%) per
annum from the date of finality of this judgment until its full satisfaction pursuant to Nacar v. Gallery Frames. 49

WHEREFORE, all the foregoing considered, the Decision dated January 30, 2009 of the Court of Appeals in CA-
G.R. CV No. 89482 is hereby AFFlHMED with MODIFICATION in that the interest rate on the award of
US$8,500.00 shall be six percent (6%) per annum from the date of finality of this judgment until fully paid.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

G.R. No. 182864, January 12, 2015

EASTERN SHIPPING LINES, INC., Petitioner, v. BPI/MS INSURANCE CORP., & MITSUI SUMITOMO INSURANCE CO.,
LTD., Respondents.

DECISION

PEREZ, J.:

Before this Court is a Petition for Review on Certiorari1 of the Decision2 of the Second Division of the Court of
Appeals in CA-G.R. CV No. 88744 dated 31 January 2008, modifying the Decision of the Regional Trial Court (RTC)
by upholding the liability of Eastern Shipping Lines, Inc. (ESLI) but absolving Asian Terminals, Inc. (ATI) from
liability and deleting the award of attorney’s fees.

The facts gathered from the records follow:

On 29 December 2004, BPI/MS Insurance Corporation (BPI/MS) and Mitsui Sumitomo Insurance Company
Limited (Mitsui) filed a Complaint3 before the RTC of Makati City against ESLI and ATI to recover actual damages
amounting to US$17,560.48 with legal interest, attorney’s fees and costs of suit.

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In their complaint, BPI/MS and Mitsui alleged that on 2 February 2004 at Yokohama, Japan, Sumitomo
Corporation shipped on board ESLI’s vessel M/V “Eastern Venus 22” 22 coils of various Steel Sheet weighing
159,534 kilograms in good order and condition for transportation to and delivery at the port of Manila,
Philippines in favor of consignee Calamba Steel Center, Inc. (Calamba Steel) located in Saimsim, Calamba, Laguna
as evidenced by a Bill of Lading with Nos. ESLIYMA001. The declared value of the shipment was US$83,857.59 as
shown by an Invoice with Nos. KJGE-03-1228-NT/KE3. The shipment was insured with the respondents BPI/MS
and Mitsui against all risks under Marine Policy No. 103-GG03448834.

On 11 February 2004, the complaint alleged that the shipment arrived at the port of Manila in an unknown
condition and was turned over to ATI for safekeeping. Upon withdrawal of the shipment by the Calamba Steel’s
representative, it was found out that part of the shipment was damaged and was in bad order condition such that
there was a Request for Bad Order Survey. It was found out that the damage amounted to US$4,598.85
prompting Calamba Steel to reject the damaged shipment for being unfit for the intended purpose.

On 12 May 2004 at Kashima, Japan, Sumitomo Corporation again shipped on board ESLI’s vessel M/V “Eastern
Venus 25” 50 coils in various Steel Sheet weighing 383,532 kilograms in good order and condition for
transportation to and delivery at the port of Manila, Philippines in favor of the same consignee Calamba Steel as
evidenced by a Bill of Lading with Nos. ESLIKSMA002. The declared value of the shipment was US$221,455.58 as
evidenced by Invoice Nos. KJGE-04-1327-NT/KE2. The shipment was insured with the respondents BPI/MS and
Mitsui against all risks under Marine Policy No. 104-GG04457785.

On 21 May 2004, ESLI’s vessel with the second shipment arrived at the port of Manila partly damaged and in bad
order. The coils sustained further damage during the discharge from vessel to shore until its turnover to ATI’s
custody for safekeeping.

Upon withdrawal from ATI and delivery to Calamba Steel, it was found out that the damage amounted to
US$12,961.63. As it did before, Calamba Steel rejected the damaged shipment for being unfit for the intended
purpose.

Calamba Steel attributed the damages on both shipments to ESLI as the carrier and ATI as the arrastreoperator in
charge of the handling and discharge of the coils and filed a claim against them. When ESLI and ATI refused to
pay, Calamba Steel filed an insurance claim for the total amount of the cargo against BPI/MS and Mitsui as cargo
insurers. As a result, BPI/MS and Mitsui became subrogated in place of and with all the rights and defenses
accorded by law in favor of Calamba Steel.

Opposing the complaint, ATI, in its Answer, denied the allegations and insisted that the coils in two shipments
were already damaged upon receipt from ESLI’s vessels. It likewise insisted that it exercised due diligence in the
handling of the shipments and invoked that in case of adverse decision, its liability should not exceed P5,000.00
pursuant to Section 7.01, Article VII 4 of the Contract for Cargo Handling Services between Philippine Ports
Authority (PPA) and ATI.5 A cross-claim was also filed against ESLI.

On its part, ESLI denied the allegations of the complainants and averred that the damage to both shipments was
incurred while the same were in the possession and custody of ATI and/or of the consignee or its representatives.
It also filed a cross-claim against ATI for indemnification in case of liability. 6chanRoblesvirtualLawlibrary

To expedite settlement, the case was referred to mediation but it was returned to the trial court for further
proceedings due to the parties’ failure to resolve the legal issues as noted in the Mediator’s Report dated 28 June
2005.7chanRoblesvirtualLawlibrary

On 10 January 2006, the court issued a Pre-Trial Order wherein the following stipulations were agreed upon by
the parties:chanroblesvirtuallawlibrary

1. Parties admitted the capacity of the parties to sue and be sued;

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 2. Parties likewise admitted the existence and due execution of the Bill of Lading covering various steel
sheets in coil attached to the Complaint as Annex A;

3. Parties admitted the existence of the Invoice issued by Sumitomo Corporation, a true and faithful copy of
which was attached to the Complaint as Annex B;

4. Parties likewise admitted the existence of the Marine Cargo Policy issued by the Mitsui Sumitomo
Insurance Company, Limited, copy of which was attached to the Complaint as Annex C;

5. [ATI] admitted the existence and due execution of the Request for Bad Order Survey dated February 13,
2004, attached to the Complaint as Annex D;

6. Insofar as the second cause of action, [ESLI] admitted the existence and due execution of the document
[Bill of Lading Nos. ESLIKSMA002, Invoice with Nos. KJGE-04-1327-NT/KE2 and Marine Cargo Policy
against all risks on the second shipment] attached to the Complaint as Annexes E, F and G;

7. [ATI] admitted the existence of the Bill of Lading together with the Invoices and Marine Cargo Policy. [It]
likewise admitted by [ATI] are the Turn Over Survey of Bad Order Cargoes attached to the Complaint as
Annexes H, H-1 and J.8

The parties agreed that the procedural issue was whether there was a valid subrogation in favor of BPI/MS and
Mitsui; and that the substantive issues were, whether the shipments suffered damages, the cause of damage, and
the entity liable for reparation of the damages caused. 9chanRoblesvirtualLawlibrary

Due to the limited factual matters of the case, the parties were required to present their evidence through
affidavits and documents. Upon submission of these evidence, the case was submitted for
resolution.10chanRoblesvirtualLawlibrary

BPI/MS and Mitsui, to substantiate their claims, submitted the Affidavits of (1) Mario A. Manuel (Manuel), 11 the
Cargo Surveyor of Philippine Japan Marine Surveyors and Sworn Measurers Corporation who personally
examined and conducted the surveys on the two shipments; (2) Richatto P. Almeda,12 the General Manager of
Calamba Steel who oversaw and examined the condition, quantity, and quality of the shipped steel coils, and who
thereafter filed formal notices and claims against ESLI and ATI; and (3) Virgilio G. Tiangco, Jr., 13 the Marine Claims
Supervisor of BPI/MS who processed the insurance claims of Calamba Steel. Along with the Affidavits were the
Bills of Lading14 covering the two shipments, Invoices,15 Notices of Loss of Calamba Steel,16 Subrogation
Form,17 Insurance Claims,18 Survey Reports,19 Turn Over Survey of Bad Order Cargoes20 and Request for Bad Order
Survey.21chanRoblesvirtualLawlibrary

ESLI, in turn, submitted the Affidavits of Captain Hermelo M. Eduarte, 22 Manager of the Operations Department of
ESLI, who monitored in coordination with ATI the discharge of the two shipments, and Rodrigo Victoria
(Rodrigo),23 the Cargo Surveyor of R & R Industrial and Marine Services, Inc., who personally surveyed the subject
cargoes on board the vessel as well as the manner the ATI employees discharged the coils. The documents
presented were the Bills of Lading, Secretary’s Certificate 24 of PPA, granting ATI the duty and privilege to
provide arrastre and stevedoring services at South Harbor, Port of Manila, Contract for Cargo Handling
Services,25 Damage Report26 and Turn Over Report made by Rodrigo.27 ESLI also adopted the Survey Reports
submitted by BPI/MS and Mitsui.28chanRoblesvirtualLawlibrary

Lastly, ATI submitted the Affidavits of its Bad Order Inspector Ramon Garcia (Garcia) 29 and Claims Officer Ramiro
De Vera.30 The documents attached to the submissions were the Turn Over Surveys of Bad Cargo
Order,31 Requests for Bad Order Survey,32 Cargo Gatepasses issued by ATI,33 Notices of Loss/Claims of Calamba
Steel34 and Contract for Cargo Handling Services.35chanRoblesvirtualLawlibrary

On 17 September 2006, RTC Makati City rendered a decision finding both the ESLI and ATI liable for the damages
sustained by the two shipments. The dispositive portion reads:chanroblesvirtuallawlibrary

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WHEREFORE, judgment is hereby rendered in favor of [BPI/MS and Mitsui] and against [ESLI Inc.] and [ATI], jointly
and severally ordering the latter to pay [BPI/MS and Mitsui] the following:

1. Actual damages amounting to US$17,560.48 plus 6% legal interest per annum commencing from the
filing of this complaint, until the same is fully paid;

2. Attorney’s fees in a sum equivalent to 20% of the amount claimed;

3. Costs of suit.36

Aggrieved, ESLI and ATI filed their respective appeals before the Court of Appeals on both questions of fact and
law.37chanRoblesvirtualLawlibrary

Before the appellate court, ESLI argued that the trial court erred when it found BPI/MS has the capacity to sue
and when it assumed jurisdiction over the case. It also questioned the ruling on its liability since the Survey
Reports indicated that the cause of loss and damage was due to the “ rough handling of ATI’s stevedores during
discharge from vessel to shore and during loading operation onto the trucks. ” It invoked the limitation of liability
of US$500.00 per package as provided in Commonwealth Act No. 65 or the Carriage of Goods by Sea Act
(COGSA).38chanRoblesvirtualLawlibrary

On the other hand, ATI questioned the capacity to sue of BPI/MS and Mitsui and the award of attorney’s fees
despite its lack of justification in the body of the decision. ATI also imputed error on the part of the trial court
when it ruled that ATI’s employees were negligent in the ruling of the shipments. It also insisted on the
applicability of the provision of COGSA on limitation of liability.39chanRoblesvirtualLawlibrary

In its Decision,40 the Court of Appeals absolved ATI from liability thereby modifying the decision of the trial court.
The dispositive portions reads:chanroblesvirtuallawlibrary

WHEREFORE, the appeal of ESLI is DENIED, while that of ATI is GRANTED. The assailed Judgment dated
September 17, 2006 of Branch 138, RTC of Makati City in Civil Case No. 05-108 is hereby MODIFIED absolving ATI
from liability and deleting the award of attorney’s fees. The rest of the decision is affirmed.41

Before this Court, ESLI seeks the reversal of the ruling on its liability.

At the outset, and notably, ESLI included among its arguments the attribution of liability to ATI but it failed to
implead the latter as a party to the present petition. This non-inclusion was raised by BPI/MS and Mitsui as an
issue42 in its Comment/Opposition43 and Memorandum:44chanRoblesvirtualLawlibrary

For reasons known only to [ESLI], it did not implead ATI as a party respondent in this case when it could have
easily done so. Considering the nature of the arguments raised by petitioner pointing to ATI as solely responsible
for the damages sustained by the subject shipments, it is respectfully submitted that ATI is an indispensable party
in this case. Without ATI being impleaded, the issue of whether ATI is solely responsible for the damages could
not be determined with finality by this Honorable Court. ATI certainly deserves to be heard on the issue but it
could not defend itself because it was not impleaded before this Court. Perhaps, this is the reason why [ESLI] left
out ATI in this case so that it could not rebut while petitioner puts it at fault. 45

ESLI in its Reply46 put the blame for the non-exclusion of ATI to BPI/MS and Mitsui:chanroblesvirtuallawlibrary

[BPI/MS and Mitsui] claim that herein [ESLI] did not implead [ATI] as a party respondent in the Petition for Review
on Certiorari it had filed. Herein Petitioner submits that it is not the obligation of [ESLI] to implead ATI as the
same is already the look out of [BPI/MS and Mitsui]. If [BPI/MS and Mitsui] believe that ATI should be made liable,
they should have filed a Motion for Reconsideration with the Honorable Court of Appeals. The fact that [BPI/MS
and Mitsui] did not even lift a finger to question the decision of the Honorable Court of Appeals goes to show
that [BPI/MS and Mitsui] are not interested as to whether or not ATI is indeed liable. 47

It is clear from the exchange that both [ESLI] and [BPI/MS and Mitsui] are aware of the non-inclusion of ATI,
Page 88 of 343
the arrastre operator, as a party to this review of the Decision of the Court of Appeals. By blaming each other for
the exclusion of ATI, [ESLI] and [BPI/MS and Mitsui] impliedly agree that the absolution of ATI from liability is final
and beyond review. Clearly, [ESLI] is the consequential loser. It alone must bear the proven liability for the loss of
the shipment. It cannot shift the blame to ATI, the arrastre operator, which has been cleared by the Court of
Appeals. Neither can it argue that the consignee should bear the loss.

Thus confined, we go to the merits of the arguments of ESLI.

First Issue: Liability of ESLI

ESLI bases of its non-liability on the survey reports prepared by BPI/MS and Mitsui’s witness Manuel which found
that the cause of damage was the rough handling on the shipment by the stevedores of ATI during the
discharging operations.48 However, Manuel does not absolve ESLI of liability. The witness in fact includes ESLI in
the findings of negligence. Paragraphs 3 and 11 of the affidavit of witness Manuel attribute fault to both ESLI and
ATI.

3. The vessel M.V. “EASTERN VENUS” V 22-S carrying the said shipment of 22 coils of various steel sheets arrived
at the port of Manila and discharged the said shipment on or about 11 February 2004 to the arrastre operator
[ATI]. I personally noticed that the 22 coils were roughly handled during their discharging from the vessel to the
pier of [ATI] and even during the loading operations of these coils from the pier to the trucks that will transport
the coils to the consignees’s warehouse. During the aforesaid operations, the employees and forklift operators of
[ESLI] and [ATI] were very negligent in the handling of the subject cargoes.

xxxx

11. The vessel M.V. “EASTERN VENUS” V 25-S carrying the said shipment of 50 coils of various steel sheets arrived
at the port of Manila and discharged the said shipment on or about 21 May 2004 to the arrastre operator [ATI]. I
personally noticed that the 50 coils were roughly handled during their discharging from the vessel to the pier of
[ATI] and even during the loading operations of these coils from the pier to the trucks that will transport the coils
to the consignees’s warehouse. During the aforesaid operations, the employees and forklift operators of [ESLI] and
[ATI] were very negligent in the handling of the subject cargoes.49 (Emphasis supplied).

ESLI cannot rely only on parts it chooses. The entire body of evidence should determine the liability of the parties.
From the statements of Manuel, [ESLI] was negligent, whether solely or together with ATI.

To further press its cause, ESLI cites the affidavit of its witness Rodrigo who stated that the cause of the damage
was the rough mishandling by ATI’s stevedores.

The affidavit of Rodrigo states that his functions as a cargo surveyor are, (1) getting hold of a copy of the bill of
lading and cargo manifest; (2) inspection and monitoring of the cargo on-board, during discharging and after
unloading from the vessel; and (3) making a necessary report of his findings. Thus, upon arrival at the South
Harbor of Manila of the two vessels of ESLI on 11 February 2004 and on 21 May 2004, Rodrigo immediately
boarded the vessels to inspect and monitor the unloading of the cargoes. In both instances, it was his finding that
there was mishandling on the part of ATI’s stevedores which he reported as the cause of the
damage.50chanRoblesvirtualLawlibrary

Easily seen, however, is the absence of a crucial point in determining liability of either or both ESLI and ATI – lack
of determination whether the cargo was in a good order condition as described in the bills of lading at the time
of his boarding. As Rodrigo admits, it was also his duty to inspect and monitor the cargo on-board upon arrival
of the vessel. ESLI cannot invoke its non-liability solely on the manner the cargo was discharged and unloaded.
The actual condition of the cargoes upon arrival prior to discharge is equally important and cannot be
disregarded. Proof is needed that the cargo arrived at the port of Manila in good order condition and remained
as such prior to its handling by ATI.

Common carriers, from the nature of their business and on public policy considerations, are bound to observe

Page 89 of 343
extraordinary diligence in the vigilance over the goods transported by them. Subject to certain exceptions
enumerated under Article 173451 of the Civil Code, common carriers are responsible for the loss, destruction, or
deterioration of the goods. The extraordinary responsibility of the common carrier lasts from the time the goods
are unconditionally placed in the possession of, and received by the carrier for transportation until the same are
delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive
them.52chanRoblesvirtualLawlibrary

In maritime transportation, a bill of lading is issued by a common carrier as a contract, receipt and symbol of the
goods covered by it. If it has no notation of any defect or damage in the goods, it is considered as a “clean bill of
lading.” A clean bill of lading constitutes prima facie evidence of the receipt by the carrier of the goods as therein
described.53chanRoblesvirtualLawlibrary

Based on the bills of lading issued, it is undisputed that ESLI received the two shipments of coils from shipper
Sumitomo Corporation in good condition at the ports of Yokohama and Kashima, Japan. However, upon arrival at
the port of Manila, some coils from the two shipments were partly dented and crumpled as evidenced by the
Turn Over Survey of Bad Order Cargoes No. 67982 dated 13 February 2004 54 and Turn Over Survey of Bad Order
Cargoes Nos. 6836355 and 6836556 both dated 24 May 2004 signed by ESLI’s representatives, a certain Tabanao
and Rodrigo together with ATI’s representative Garcia. According to Turn Over Survey of Bad Order Cargoes No.
67982, four coils and one skid were partly dented and crumpled prior to turnover by ESLI to ATI’s possession
while a total of eleven coils were partly dented and crumpled prior to turnover based on Turn Over Survey Bad
Order Cargoes Nos. 68363 and 68365.

Calamba Steel requested for a re-examination of the damages sustained by the two shipments. Based on the
Requests for Bad Order Survey Nos. 5826757 and 5825458 covering the first shipment dated 13 and 17 February
2004, four coils were damaged prior to turnover. The second Request for Bad Order Survey No. 58658 59 dated 25
May 2004 also affirmed the earlier findings that eleven coils on the second shipment were damaged prior to
turnover.

In Asian Terminals, Inc., v. Philam Insurance Co., Inc.,60 the Court based its ruling on liability on the Bad Order
Cargo and Turn Over of Bad Order. The Receipt bore a notation “B.O. not yet t/over to ATI,” while the Survey
stated that the said steel case was not opened at the time of survey and was accepted by the arrastre in good
order. Based on these documents, packages in the Asian Terminals, Inc. case were found damaged while in the
custody of the carrier Westwind Shipping Corporation.

Mere proof of delivery of the goods in good order to a common carrier and of their arrival in bad order at their
destination constitutes a prima facie case of fault or negligence against the carrier. If no adequate explanation is
given as to how the deterioration, loss, or destruction of the goods happened, the transporter shall be held
responsible.61 From the foregoing, the fault is attributable to ESLI. While no longer an issue, it may be nonetheless
state that ATI was correctly absolved of liability for the damage.

Second Issue: Limitation of Liability

ESLI assigns as error the appellate court’s finding and reasoning that the package limitation under the COGSA 62 is
inapplicable even if the bills of lading covering the shipments only made reference to the corresponding invoices.
Noticeably, the invoices specified among others the weight, quantity, description and value of the cargoes, and
bore the notation “Freight Prepaid” and “As Arranged.” 63 ESLI argues that the value of the cargoes was not
incorporated in the bills of lading 64 and that there was no evidence that the shipper had presented to the carrier
in writing prior to the loading of the actual value of the cargo, and, that there was a no payment of
corresponding freight.65 Finally, despite the fact that ESLI admits the existence of the invoices, it denies any
knowledge either of the value declared or of any information contained therein. 66chanRoblesvirtualLawlibrary

According to the New Civil Code, the law of the country to which the goods are to be transported shall govern
the liability of the common carrier for their loss, destruction or deterioration. 67 The Code takes precedence as the
primary law over the rights and obligations of common carriers with the Code of Commerce and COGSA
applying suppletorily.68chanRoblesvirtualLawlibrary

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The New Civil Code provides that a stipulation limiting a common carrier’s liability to the value of the goods
appearing in the bill of lading is binding, unless the shipper or owner declares a greater value. 69 In addition, a
contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration
of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agreed
upon.70chanRoblesvirtualLawlibrary

COGSA, on the other hand, provides under Section 4, Subsection 5 that an amount recoverable in case of loss or
damage shall not exceed US$500.00 per package or per customary freight unless the nature and value of such
goods have been declared by the shipper before shipment and inserted in the bill of lading.

In line with these maritime law provisions, paragraph 13 of bills of lading issued by ESLI to the shipper specifically
provides a similar restriction:chanroblesvirtuallawlibrary

The value of the goods, in calculating and adjusting any claims for which the Carrier may be liable shall, to avoid
uncertainties and difficulties in fixing value, be deemed to the invoice value of the goods plus ocean freight and
insurance, if paid, Irrespective of whether any other value is greater or less, and any partial loss or damage shall
be adjusted pro rata on the basis of such value; provided, however, that neither the Carrier nor the ship shall in
any event be or become liable for any loss, non-delivery or misdelivery of or damage or delay to, or in
connection with the custody or transportation of the goods in an amount exceeding $500.00 per package lawful
money of the United States, or in case of goods not shipped in packages, per customary freight unit, unless the
nature of the goods and a valuation higher than $500.00 is declared in writing by the shipper on delivery to the
Carrier and inserted in the bill of lading and extra freight is paid therein as required by applicable tariffs to obtain
the benefit of such higher valuation. In which case even if the actual value of the goods per package or unit
exceeds such declared value, the value shall nevertheless be deemed to be the declared value and any Carrier’s
liability shall not exceed such declared value and any partial loss or damage shall be adjusted pro-rata on the
basis thereof. The Carrier shall not be liable for any loss or profit or any consequential or special damage and
shall have the option of replacing any lost goods and replacing o reconditioning any damage goods. No oral
declaration or agreement shall be evidence of a value different from that provided
therein.71chanRoblesvirtualLawlibrary

xxxx

Accordingly, the issue whether or not ESLI has limited liability as a carrier is determined by either absence or
presence of proof that the nature and value of the goods have been declared by Sumitomo Corporation and
inserted in the bills of lading.

ESLI contends that the invoices specifying the weight, quantity, description and value of the cargo in reference to
the bills of lading do not prove the fact that the shipper complied with the requirements mandated by the
COGSA. It contends that there must be an insertion of this declaration in the bill of lading itself to fall outside the
statutory limitation of liability.

ESLI asserts that the appellate court erred when it ruled that there was compliance with the declaration
requirement even if the value of the shipment and fact of payment were indicated on the invoice and not on the
bill of lading itself.

There is no question about the declaration of the nature, weight and description of the goods on the first bill of
lading.

The bills of lading represent the formal expression of the parties’ rights, duties and obligations. It is the best
evidence of the intention of the parties which is to be deciphered from the language used in the contract, not
from the unilateral post facto assertions of one of the parties, or of third parties who are strangers to the
contract.72 Thus, when the terms of an agreement have been reduced to writing, it is deemed to contain all the
terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such
terms other than the contents of the written agreement. 73chanRoblesvirtualLawlibrary

Page 91 of 343
As to the non-declaration of the value of the goods on the second bill of lading, we see no error on the part of
the appellate court when it ruled that there was a compliance of the requirement provided by COGSA. The
declaration requirement does not require that all the details must be written down on the very bill of lading itself.
It must be emphasized that all the needed details are in the invoice, which “contains the itemized list of goods
shipped to a buyer, stating quantities, prices, shipping charges,” and other details which may contain numerous
sheets.74 Compliance can be attained by incorporating the invoice, by way of reference, to the bill of lading
provided that the former containing the description of the nature, value and/or payment of freight charges is as
in this case duly admitted as evidence.

In Unsworth Transport International (Phils.), Inc. v. Court of Appeals ,75 the Court held that the insertion of an
invoice number does not in itself sufficiently and convincingly show that petitioner had knowledge of the value of
the cargo. However, the same interpretation does not squarely apply if the carrier had been advised of the value
of the goods as evidenced by the invoice and payment of corresponding freight charges. It would be unfair for
ESLI to invoke the limitation under COGSA when the shipper in fact paid the freight charges based on the value
of the goods. In Adams Express Company v. Croninger,76 it was said: “Neither is it conformable to plain principles
of justice that a shipper may understate the value of his property for the purpose of reducing the rate, and then
recover a larger value in case of loss. Nor does a limitation based upon an agreed value for the purpose of
adjusting the rate conflict with any sound principle of public policy. ” Conversely, but for the same reason, it is
unjust for ESLI to invoke the limitation when it is informed that the shipper paid the freight charges
corresponding to the value of the goods.

Also, ESLI admitted the existence and due execution of the Bills of Lading and the Invoice containing the nature
and value of the goods on the second shipment. As written in the Pre-Trial Order,77 the parties, including ESLI,
admitted the existence and due execution of the two Bills of Lading78 together with the Invoice on the second
shipment with Nos. KJGE-04-1327-NT/KE279 dated 12 May 2004. On the first shipment, ESLI admitted the existence
of the Invoice with Nos. KJGE-031228-NT/KE380dated 2 February 2004.

The effect of admission of the genuineness and due execution of a document means that the party whose
signature it bears admits that he voluntarily signed the document or it was signed by another for him and with his
authority.81chanRoblesvirtualLawlibrary

A review of the bill of ladings and invoice on the second shipment indicates that the shipper declared the nature
and value of the goods with the corresponding payment of the freight on the bills of lading. Further, under the
caption “description of packages and goods,” it states that the description of the goods to be transported as
“various steel sheet in coil” with a gross weight of 383,532 kilograms (89.510 M3). On the other hand, the amount
of the goods is referred in the invoice, the due execution and genuineness of which has already been admitted by
ESLI, is US$186,906.35 as freight on board with payment of ocean freight of US$32,736.06 and insurance premium
of US$1,813.17. From the foregoing, we rule that the non- limitation of liability applies in the present case.

We likewise accord the same binding effect on the contents of the invoice on the first shipment.

ESLI contends that what was admitted and written on the pre-trial order was only the existence of the first
shipment’ invoice but not its contents and due execution. It invokes admission of existence but renounces any
knowledge of the contents written on it.82chanRoblesvirtualLawlibrary

Judicial admissions are legally binding on the party making the admissions. Pre-trial admission in civil cases is one
of the instances of judicial admissions explicitly provided for under Section 7, Rule 18 of the Rules of Court, which
mandates that the contents of the pre-trial order shall control the subsequent course of the action, thereby,
defining and limiting the issues to be tried. In Bayas v. Sandiganbayan,83this Court emphasized
that:chanroblesvirtuallawlibrary

Once the stipulations are reduced into writing and signed by the parties and their counsels, they become binding
on the parties who made them. They become judicial admissions of the fact or facts stipulated. Even if placed at a

Page 92 of 343
disadvantageous position, a party may not be allowed to rescind them unilaterally, it must assume the
consequences of the disadvantage.84
Moreover, in Alfelor v. Halasan,85 this Court declared that:chanroblesvirtuallawlibrary

A party who judicially admits a fact cannot later challenge that fact as judicial admissions are a waiver of proof;
production of evidence is dispensed with. A judicial admission also removes an admitted fact from the field of
controversy. Consequently, an admission made in the pleadings cannot be controverted by the party making
such admission and are conclusive as to such party, and all proofs to the contrary or inconsistent therewith
should be ignored, whether objection is interposed by the party or not. The allegations, statements or admissions
contained in a pleading are conclusive as against the pleader. A party cannot subsequently take a position
contrary of or inconsistent with what was pleaded. 86 (Citations omitted)

The admission having been made in a stipulation of facts at pre-trial by the parties, it must be treated as a judicial
admission. Under Section 4, of Rule 129 of the Rules of Court, a judicial admission requires no
proof.87chanRoblesvirtualLawlibrary

It is inconceivable that a shipping company with maritime experience and resource like the ESLI will admit the
existence of a maritime document like an invoice even if it has no knowledge of its contents or without having
any copy thereof.

ESLI also asserts that the notation “Freight Prepaid” and “As Arranged,” does not prove that there was an actual
declaration made in writing of the payment of freight as required by COGSA. ESLI did not as it could not deny
payment of freight in the amount indicated in the documents. Indeed, the earlier discussions on ESLI’s admission
of the existence and due execution of the invoices, cover and disprove the argument regarding actual declaration
of payment. The bills of lading bore a notation on the manner of payment which was “Freight Prepaid” and “As
Arranged” while the invoices indicated the amount exactly paid by the shipper to ESLI.chanrobleslaw

WHEREFORE, we DENY the Petition for Review on Certiorari. The Decision dated 31 January 2008 and Resolution
dated 5 May 2008 of the Second Division of the Court of Appeals in CA-G.R. CV. No. 88744 are
hereby AFFIRMED.

SO ORDERED.cralawlawlibrary

Sereno, C.J., (Chairman), Leonardo-De Castro, Peralta,*and Reyes,** JJ., concur.

CORPORATION CODE

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR
MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur),
which seeks to reverse the October 1, 2010 Decision 1 and the February 15, 2011 Resolution of the Court of Appeals
(CA).

The Facts

Page 93 of 343
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province
of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that
the areas where it wanted to undertake exploration and mining activities where already covered by Mineral
Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an
MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the
Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720
hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos
Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur. 2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise
Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB,
Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an
area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently,
PLMDC conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of
Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154
(formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra,
Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said
MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions
for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned
and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since
MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs
over the areas covered by applications since it knows that it can only participate in mining activities through
corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were
mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which
are reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No.
(RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or
plural, shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation,
partnership, association, or cooperative organized or authorized for the purpose of engaging in mining, with
technical and financial capability to undertake mineral resources development and duly registered in accordance
with law at least sixty per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That
a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and
Page 94 of 343
AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the
issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60%
of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares
of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of
McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro), 5 the shares of MBMI will
not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool
used in determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the
Foreign Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues
in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont
has no personality to sue them because it has no pending claim or application over the areas applied for by
petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other
hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by the MPSA
application of respondents may be considered if and when they are qualified under the law. The violation of the
requirements for the issuance and/or grant of permits over mining areas is clearly established thus, there is
reason to believe that the cancellation and/or revocation of permits already issued under the premises is in order
and open the areas covered to other qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and
Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as
Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL
AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian
company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs.
Thereafter, on February 7, 2008, the POA issued an Order7 denying the Motion for Reconsideration filed by
petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal 8 and
Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of
Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also,
through a letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs.
McArthur’s FTAA was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was
converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30,
2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint 15 with the
Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration of
petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining in violation
of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend
Proceeding before the MAB praying for the suspension of the proceedings on the appeals filed by McArthur,
Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92
(RTC) a Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ
of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB
proceedings pending the resolution of the Complaint before the SEC.

Page 95 of 343
But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an
Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case
Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for
Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January
2007 is hereby ordered DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order 18 granting Redmont’s application for a TRO and
setting the case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the September 10, 2008
Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration 20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining
the MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for
Reconsideration and Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On
October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1,
2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the
Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign
corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement
should be recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left
for determination by the Secretary of the DENR and the President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when
it realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians.
Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining
to the exploitation of natural resources, the CA used the "grandfather rule" to determine the nationality of
petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation
Page 96 of 343
or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to
aliens.24(emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned
majority of the common stocks of the petitioners as well as at least 60% equity interest of other majority
shareholders of petitioners through joint venture agreements. The CA found that through a "web of corporate
layering, it is clear that one common controlling investor in all mining corporations involved x x x is
MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-
in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications
suspicious in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by
the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has
jurisdiction over them and that it also has the power to determine the of nationality of petitioners as a
prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture or production-
sharing agreements" of the state to mining rights. However, it also stated that the POA’s jurisdiction is limited
only to the resolution of the dispute and not on the approval or rejection of the MPSAs. It stipulated that only the
Secretary of the DENR is vested with the power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners
McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s declaration
that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated
May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein
it canceled and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small
Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment
Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that
petitioners committed violations against the abovementioned laws and failed to submit evidence to negate them.
The Decision further quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation
and claims made by petitioners of being domestic or Filipino corporations and the admitted continued mining
operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an
MPSA application which was eventually transferred to Narra. It also agreed with the POA’s estimation that the
filing of the FTAA applications by petitioners is a clear admission that they are "not capable of conducting a large
scale mining operation and that they need the financial and technical assistance of a foreign entity in their
operation, that is why they sought the participation of MBMI Resources, Inc." 28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts. 29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA,
docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision
and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now
pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the
following errors of the CA:
Page 97 of 343
 I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the
subject matter of the controversy, the MPSA Applications, have already been converted into FTAA
applications and that the same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the
Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum
shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of
1991, as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is based on mere conjectures and surmises without
any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue
of supervening events, so that a declaration thereon would be of no practical use or value."32 Thus, the courts
"generally decline jurisdiction over the case or dismiss it on the ground of mootness." 33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of
"mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David v.
Macapagal-Arroyo (David), the Court provided four instances where courts can decide an otherwise moot case,
thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the
bar, and the public; and

Page 98 of 343
 4.) The case is capable of repetition yet evading review. 34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of
the Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our
country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The
intricate corporate layering utilized by the Canadian company, MBMI, is of exceptional character and involves
paramount public interest since it undeniably affects the exploitation of our Country’s natural resources. The
corresponding actions of petitioners during the lifetime and existence of the instant case raise questions as what
principle is to be applied to cases with similar issues. No definite ruling on such principle has been pronounced
by the Court; hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench,
the bar and the public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian
company, MBMI, can keep on utilizing dummy Filipino corporations through various schemes of corporate
layering and conversion of applications to skirt the constitutional prohibition against foreign mining in Philippine
soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the
conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against
them since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on
the prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would
want us to correct the CA’s finding which deemed the aforementioned conversions of applications as suspicious
in nature, since it is based on mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The
changing of applications by petitioners from one type to another just because a case was filed against them, in
truth, would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion
not stem from the case challenging their citizenship and to have the case dismissed against them for being
"moot"? It is quite obvious that it is petitioners’ strategy to have the case dismissed against them for being
"moot."

Consider the history of this case and how petitioners responded to every action done by the court or appropriate
government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA
applications of petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA
applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect change of
applications while the case was pending before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents
are not capable of conducting a large scale mining operation and that they need the financial and technical
assistance of a foreign entity in their operation that is why they sought the participation of MBMI Resources, Inc.
The participation of MBMI in the corporation only proves the fact that it is the Canadian company that will
provide the finances and the resources to operate the mining areas for the greater benefit and interest of the
same and not the Filipino stockholders who only have a less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts. 36

Page 99 of 343
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside
the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of
the POA of the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the
rejection of their MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA
applications or conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination
of the Secretary of the DENR and the President of the Republic of the Philippines. 37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition
asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No.
05-2010-IVB, which rendered the petition moot and academic. However, the CA, in a Resolution dated February
15, 2011 denied their motion for being a mere "rehash of their claims and defenses." 38 Standing firm on its
Decision, the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners
elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA.
Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review was filed,
cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are foreign
corporations since they needed the financial strength of MBMI, Inc. in order to conduct large scale mining
operations. The OP Decision also based the cancellation on the misrepresentation of facts and the violation of the
"Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign
Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s
Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their
old arguments claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a
Manifestation and Submission dated October 19, 2012, 40 wherein they asserted that the present petition is moot
since, in a remarkable turn of events, MBMI was able to sell/assign all its shares/interest in the "holding
companies" to DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final
act, wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding
companies" to DMCI, only proves that they were in fact not Filipino corporations from the start. The recent
divesting of interest by MBMI will not change the stand of this Court with respect to the nationality of petitioners
prior the suspicious change in their corporate structures. The new documents filed by petitioners are factual
evidence that this Court has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have
violated several mining laws and made misrepresentations and falsehood in their applications for FTAA which
lead to the revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around
the law using shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot
in itself because their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their
previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted
their Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate
ownership to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner
corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and
the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling interests in
enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Page 100 of 343

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation
or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos
and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality,"
pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which
provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the
stricter, more stringent grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test"
under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using
the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association
wholly owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding
and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors, in order that the corporation shall be
considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a
"Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule
"has been abandoned and is no longer the applicable rule." 41 They also opined that the last portion of Sec. 3 of
the FIA admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear
and unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of
discretion in applying the law. They said that the plain, literal meaning of the statute meant the application of the
control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution
and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule
has already been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of
potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall be under the full control and supervision of
the State. The State may directly undertake such activities, or it may enter into co-production, joint venture or
production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.
Page 101 of 343
xxxx

The President may enter into agreements with Foreign-owned corporations involving either technical or financial
assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on real contributions to the economic
growth and general welfare of the country. In such agreements, the State shall promote the development and use
of local scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the
exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60
percent ownership of capital is pertinent to this case, since the issues are centered on the utilization of our
country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners
since, as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60
percent of such capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is
freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of
the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from
foreign control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in
the cultivation of natural resources, 40 percent involves some control; not total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely,
60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock
of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who
provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of
the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.

Page 102 of 343

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent
equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the
grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases
where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the
Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution
on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the
honorable framers of our Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for
purposes, among others, of determining compliance with nationality requirements (the ‘Investee Corporation’).
Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by
individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’).
The said rules thus provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee
Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990
Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging
to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the
ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is
at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7
of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership
is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine
nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation
and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino
ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC
Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint
venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%]
invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated
Page 103 of 343
differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not
apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of
petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI,
funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are
less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince
this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance
where "doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the
said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the
total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to
have "60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in
their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications
will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application
of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent
the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or
indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure,
they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from
SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at
one thousand pesos (PhP 1,000) per share, subscribed to by the following: 44

Name Nationality Number of Shares Amount Subscribed Amount Paid

Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Corporation

MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and
composition as McArthur. In fact, it would seem that MBMI is also a major investor and "controls" 45 MBMI and
also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar),
Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Page 104 of 343

Madridejos Mining Corporation

Name Nationality Number of Shares Amount Subscribed Amount Paid

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the
number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major
stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with
respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements
with several Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest in the
Olympic Properties.46 Quoting the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a
series of agreements including a Property Purchase and Development Agreement (the Transaction Documents)
with respect to three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction
Documents effectively establish a joint venture between the Company and Olympic for purposes of developing
the Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture.
Under certain circumstances and upon achieving certain milestones, the Company may earn up to a 100%
interest, subject to a 2.5% net revenue royalty. 47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was
utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity
interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000)
divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

Page 105 of 343

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate
structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI,
Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Inc.

Page 106 of 343

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity
between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic,
MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the
amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos
(PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine
hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate
structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes
petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization
and development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application,
whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock
of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one
thousand pesos (PhP 1,000) per share, shown as follows:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &

Development

Corp.

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MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this
corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha South Resources Filipino 6,596 PhP PhP 0

Development Corporation 6,596,000.00

MBMI Resources, Canadian 3,396 PhP PhP

3,396,000.00 2,796,000.00
Inc.

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

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 Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP

10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid
by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp.
(PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind
the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition,
exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint
control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the
Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the
companies in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and
adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint
venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC
and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations

Page 109 of 343

under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control
over the corporations mentioned. In effect, whether looking at the capital structure or the underlying
relationships between and among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or
agent" rule and "admission by privies" under the Rules of Court in the instant case, by pointing out that
statements made by MBMI should not be admitted in this case since it is not a party to the case and that it is not
a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the
scope of his authority and during the existence of the partnership or agency, may be given in evidence against
such party after the partnership or agency is shown by evidence other than such act or declaration itself. The
same rule applies to the act or declaration of a joint owner, joint debtor, or other person jointly interested with
the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission
of the latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must
be shown, and that proof of the fact must be made by evidence other than the admission itself." 49 Thus,
petitioners assert that the CA erred in finding that a partnership relationship exists between them and MBMI
because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a
joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the
CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can
be formed, it should have been formally reduced into writing since the capital involved is more than three
thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to form a partnership between
petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry
to a common fund with the intention of dividing the profits among themselves. 50 On the other hand, joint
ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures
and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin
to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are
closely analogous to and substantially the same, if not exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint
venture, very little law being found applicable to one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that
differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint
venture agreements, rules and legal incidents governing partnerships are applied. 52
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Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered
between and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are
prohibited from entering into partnership agreements; consequently, corporations enter into joint venture
agreements with other corporations or partnerships for certain transactions in order to form "pseudo
partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations entering into partnerships, then the relationship created
should be deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen as similar to partnerships since the elements of
partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then
the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI
have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has
jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont
against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the
right of Filipinos over mining areas in the Philippines against alleged foreign-owned mining corporations. Such
claim constitutes a "dispute" found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an
application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest,
or opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the
MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement
have been complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar
days from the last date of publication/posting/radio announcement, with the concerned Regional Office or
through any concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing rules and
regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of Arbitrators shall
likewise issue a certification to that effect within five (5) working days from the date of finality of resolution
thereof. Where there is no adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a
Certification to that effect within five working days therefrom.

xxxx

Page 111 of 343

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and
any adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided
in Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications
in areas outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further
evaluation by the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the
Director shall endorse the same to the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days
from receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same
shall be evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days
from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under
Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or
conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and
57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the
Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said
Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the
bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last
date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said
forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Department’s Community Environment
and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to
be filed at the Regional Office for resolution of the Panel of Arbitrators. However previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and
any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators.
(Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under
Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or
conferment of mining rights.
Page 112 of 343
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and
57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the
Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said
Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the
bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last
date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said
forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Department’s Community Environment
and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to
be filed at the Regional Office for resolution of the Panel of Arbitrators. However, previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and
any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators.
(Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or
protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and
oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no
authority to approve or reject said applications. Such power is vested in the DENR Secretary upon
recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas"
has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over
MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval
or rejection of the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of
the POA, with respect to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is
valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has
jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement
of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Page 113 of 343
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining
areas. One such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by
another interested applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA applications
where petitioners are asserting their rights to mining areas subject of their respective MPSA applications. Since
respondent filed 3 separate petitions for the denial of said applications, then a controversy has developed
between the parties and it is POA’s jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional
Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction.
Euro-med Laboratories v. Province of Batangas 55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise,
specialized training and knowledge of an administrative body, relief must first be obtained in an administrative
proceeding before resort to the courts is had even if the matter may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this
Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the
instant petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of
MBMI to DMCI, a corporation duly organized and existing under Philippine laws and is at least 60% Philippine-
owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the
State should stand since "even wholly-owned foreign corporations can enter into an FTAA with the
State."57Petitioners stress that there should no longer be any issue left as regards their qualification to enter into
FTAA contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the
"grandfather rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would
pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should
be disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877
pending before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned
corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a
non-issue in this case.

Page 114 of 343

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court there is
doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the
corporation, then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated
October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

G.R. No. 181490 April 23, 2014

MIRANT (PHILIPPINES) CORPORATION AND EDGARDO A. BAUTISTA, Petitioners,

vs.
JOSELITO A. CARO, Respondent.

DECISION

VILLARAMA, JR., J.:

At bar is a petition1 under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision 2 and
Resolution3 of the Court of Appeals (CA) dated June 26, 2007 and January 11, 2008, respectively, which reversed
and set aside the Decision4 of the National Labor Relations Commission (NLRC) in NLRC NCR CA No. 046551-05
(NCR-00-03-02511-05). The NLRC decision vacated and set aside the Decision 5 of the Labor Arbiter which found
that respondent Joselito A. Caro (Caro) was illegally dismissed by petitioner Mirant (Philippines) Corporation
(Mirant).

Petitioner corporation is organized and operating under and by virtue of the laws of the Republic of the
Philippines. It is a holding company that owns shares in project companies such as Mirant Sual Corporation and
Mirant Pagbilao Corporation (Mirant Pagbilao) which operate and maintain power stations located in Sual,
Pangasinan and Pagbilao, Quezon, respectively. Petitioner corporation and its related companies maintain
around 2,000 employees detailed in its main office and other sites. Petitioner corporation had changed its name
to CEPA Operations in 1996 and to Southern Company in 2001. In 2002, Southern Company was sold to petitioner
Mirant whose corporate parent is an Atlanta-based power producer in the United States of America. 6 Petitioner
corporation is now known as Team Energy Corporation.7

Petitioner Edgardo A. Bautista (Bautista) was the President of petitioner corporation when respondent was
terminated from employment.8

Respondent was hired by Mirant Pagbilao on January 3, 1994 as its Logistics Officer. In 2002, when Southern
Company was sold to Mirant, respondent was already a Supervisor of the Logistics and Purchasing Department of
petitioner. At the time of the severance of his employment, respondent was the Procurement Supervisor of
Mirant Pagbilao assigned at petitioner corporation’s corporate office. As Procurement Supervisor, his main task
was to serve as the link between the Materials Management Department of petitioner corporation and its staff,
and the suppliers and service contractors in order to ensure that procurement is carried out in conformity with set
policies, procedures and practices. In addition, respondent was put incharge of ensuring the timely, economical,
safe and expeditious delivery of materials at the right quality and quantity to petitioner corporation’s plant.
Respondent was also responsible for guiding and overseeing the welfare and training needs of the staff of the
Materials Management Department. Due to the nature of respondent’s functions, petitioner corporation
considers his position as confidential. 9

Page 115 of 343

The antecedent facts follow:

Respondent filed a complaint10 for illegal dismissal and money claims for 13th and 14th month pay, bonuses and
other benefits, as well as the payment of moral and exemplary damages and attorney’s fees. Respondent posits
the following allegations in his Position Paper: 11

On January 3, 1994, respondent was hired by petitioner corporation as its Logistics Officer and was assigned at
petitioner corporation’s corporate office in Pasay City. At the time of the filing of the complaint, respondent was
already a Supervisor at the Logistics and Purchasing Department with a monthly salary of ₱39,815.00.

On November 3, 2004, petitioner corporation conducted a random drug test where respondent was randomly
chosen among its employees who would be tested for illegal drug use. Through an Intracompany
Correspondence,12 these employees were informed that they were selected for random drug testing to be
conducted on the same day that they received the correspondence. Respondent was duly notified that he was
scheduled to be tested after lunch on that day. His receipt of the notice was evidenced by his signature on the
correspondence.

Respondent avers that at around 11:30 a.m. of the same day, he received a phone call from his wife’s colleague
who informed him that a bombing incident occurred near his wife’s work station in Tel Aviv, Israel where his wife
was then working as a caregiver. Respondent attached to his Position Paper a Press Release 13 of the Department
of Foreign Affairs (DFA) in Manila to prove the occurrence of the bombing incident and a letter 14 from the
colleague of his wife who allegedly gave him a phone call from Tel Aviv.

Respondent claims that after the said phone call, he proceeded to the Israeli Embassy to confirm the news on the
alleged bombing incident. Respondent further claims that before he left the office on the day of the random drug
test, he first informed the secretary of his Department, Irene Torres (Torres), at around 12:30 p.m. that he will give
preferential attention to the emergency phone call that he just received. He also told Torres that he would be
back at the office as soon as he has resolved his predicament. Respondent recounts that he tried to contact his
wife by phone but he could not reach her. He then had to go to the Israeli Embassy to confirm the bombing
incident. However, he was told by Eveth Salvador (Salvador), a lobby attendant at the Israeli Embassy, that he
could not be allowed entry due to security reasons.

On that same day, at around 6:15 p.m., respondent returned to petitioner corporation’s office. When he was
finally able to charge his cellphone at the office, he received a text message from Tina Cecilia (Cecilia), a member
of the Drug Watch Committee that conducted the drug test, informing him to participate in the said drug test. He
immediately called up Cecilia to explain the reasons for his failure to submit himself to the random drug test that
day. He also proposed that he would submit to a drug test the following day at his own expense. Respondent
never heard from Cecilia again.

On November 8, 2004, respondent received a Show Cause Notice 15 from petitioner corporation through Jaime
Dulot (Dulot), his immediate supervisor, requiring him to explain in writing why he should not be charged with
"unjustified refusal to submit to random drug testing." Respondent submitted his written explanation 16 on
November 11, 2004. Petitioner corporation further required respondent on December 14, 2004 to submit
additional pieces of supporting documents to prove that respondent was at the Israeli Embassy in the afternoon
of November 3, 2004 and that the said bombing incident actually occurred. Respondent requested for a hearing
to explain that he could not submit proof that he was indeed present at the Israeli Embassy during the said day
because he was not allegedly allowed entry by the embassy due to security reasons. On January 3, 2005,
respondent submitted the required additional supporting documents. 17

On January 13, 2005, petitioner corporation’s Investigating Panel issued an Investigating Report 18 finding
respondent guilty of "unjustified refusal to submit to random drug testing" and recommended a penalty of four
working weeks suspension without pay, instead of termination, due to the presence of mitigating circumstances.
In the same Report, the Investigating Panel also recommended that petitioner corporation should review its
policy on random drug testing, especially of the ambiguities cast by the term "unjustified refusal."

Page 116 of 343

On January 19, 2005, petitioner corporation’s Asst. Vice President for Material Management Department, George
K. Lamela, Jr. (Lamela), recommended19 that respondent be terminated from employment instead of merely being
suspended. Lamela argued that even if respondent did not outrightly refuse to take the random drug test, he
avoided the same. Lamela averred that "avoidance" was synonymous with "refusal."

On February 14, 2005, respondent received a letter 20 from petitioner corporation’s Vice President for Operations,
Tommy J. Sliman (Sliman), terminating him on the same date. Respondent filed a Motion to Appeal 21 his
termination on February 23, 2005. The motion was denied by petitioner corporation on March 1, 2005.

It is the contention of respondent that he was illegally dismissed by petitioner corporation due to the latter’s non -
compliance with the twin requirements of notice and hearing. He asserts that while there was a notice charging
him of "unjustified refusal to submit to random drug testing," there was no notice of hearing and petitioner
corporation’s investigation was not the equivalent of the "hearing" required under the law which should have
accorded respondent the opportunity to be heard.

Respondent further asserts that he was illegally dismissed due to the following circumstances:

1. He signed the notice that he was randomly selected as a participant to the company drug testing;

2. Even the Investigating Panel was at a loss in interpreting the charge because it believed that the term
"refusal" was ambiguous, and therefore such doubt must be construed in his favor; and

3. He agreed to take the drug test the following day at his own expense, which he says was clearly not an
indication of evasion from the drug test.

Petitioner corporation counters with the following allegations:

On November 3, 2004, a random drug test was conducted on petitioner corporation’s employees at its Corporate
Office at the CTC Bldg. in Roxas Blvd., Pasay City. The random drug test was conducted pursuant to Republic Act
No. 9165, otherwise known as the "Comprehensive Dangerous Drugs Act of 2002." Respondent was randomly
selected among petitioner’s employees to undergo the said drug test which was to be carried out by Drug Check
Philippines, Inc.22

When respondent failed to appear at the scheduled drug test, Cecilia prepared an incident report addressed to
Dulot, the Logistics Manager of the Materials Management Department. 23 Since it was stated under petitioner
corporation’s Mirant Drugs Policy Employee Handbook to terminate an employee for "unjustified refusal to
submit to a random drug test" for the first offense, Dulot sent respondent a Show Cause Notice 24 dated
November 8, 2004, requiring him to explain why no disciplinary action should be imposed for his failure to take
the random drug test. Respondent, in a letter dated November 11, 2004, explained that he attended to an
emergency call from his wife’s colleague and apologized for the inconvenience he had caused. He offered to
submit to a drug test the next day even at his expense. 25 Finding respondent’s explanation unsatisfactory,
petitioner corporation formed a panel to investigate and recommend the penalty to be imposed on
respondent.26 The Investigating Panel found respondent’s explanations as to his whereabouts on that day to be
inconsistent, and recommended that he be suspended for four weeks without pay. The Investigating Panel took
into account that respondent did not directly refuse to be subjected to the drug test and that he had been
serving the company for ten years without any record of violation of its policies. The Investigating Panel further
recommended that the Mirant Drug Policy be reviewed to clearly define the phrase "unjustified refusal to submit
to random drug testing."27 Petitioner corporation’s Vice-President for Operations, Sliman, however disagreed with
the Investigating Panel’s recommendations and terminated the services of respondent in accordance with the
subject drug policy. Sliman likewise stated that respondent’s violation of the policy amounted to willful breach of
trust and loss of confidence.28

A cursory examination of the pleadings of petitioner corporation would show that it concurs with the narration of
facts of respondent on material events from the time that Cecilia sent an electronic mail at about 9:23 a.m. on
November 3, 2004 to all employees of petitioner corporation assigned at its Corporate Office advising them of
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the details of the drug test – up to the time of respondent’s missing his schedule to take the drug test. Petitioner
corporation and respondent’s point of disagreement, however, is whether respondent’s proffered reasons for not
being able to take the drug test on the scheduled day constituted valid defenses that would have taken his failure
to undergo the drug test out of the category of "unjustified refusal." Petitioner corporation argues that
respondent’s omission amounted to "unjustified refusal" to submit to the random drug test as he could not
proffer a satisfactory explanation why he failed to submit to the drug test:

1. Petitioner corporation is not convinced that there was indeed such a phone call at noon of November
3, 2004 as respondent could not even tell who called him up.

2. Respondent could not even tell if he received the call via the landline telephone service at petitioner
corporation’s office or at his mobile phone.

3. Petitioner corporation was also of the opinion that granting there was such a phone call, there was no
compelling reason for respondent to act on it at the expense of his scheduled drug testing. Petitioner
corporation principally pointed out that the call merely stated that a bomb exploded near his wife’s work
station without stating that his wife was affected. Hence, it found no point in confirming it with
extraordinary haste and forego the drug test which would have taken only a few minutes to accomplish.
If at all, respondent should have undergone the drug testing first before proceeding to confirm the news
so as to leave his mind free from this obligation.

4. Petitioner corporation maintained that respondent could have easily asked permission from the Drug
Watch Committee that he was leaving the office since the place where the activity was conducted was
very close to his work station.29

To the mind of petitioners, they are not liable for illegal dismissal because all of these circumstances prove that
respondent really eluded the random drug test and was therefore validly terminated for cause after being
properly accorded with due process. Petitioners further argue that they have already fully settled the claim of
respondent as evidenced by a Quitclaim which he duly executed. Lastly, petitioners maintain that they are not
guilty of unfair labor practice as respondent’s dismissal was not intended to curtail his right to self-organization;
that respondent is not entitled to the payment of his 13th and 14th month bonuses and other incentives as he
failed to show that he is entitled to these amounts according to company policy; that respondent is not entitled
to reinstatement, payment of full back wages, moral and exemplary damages and attorney’s fees due to his
termination for cause.

In a decision dated August 31, 2005, Labor Arbiter Aliman D. Mangandog found respondent to have been illegally
dismissed. The Labor Arbiter also found that the quitclaim purportedly executed by respondent was not a bona
fide quitclaim which effectively discharged petitioners of all the claims of respondent in the case at bar. If at all,
the Labor Arbiter considered the execution of the quitclaim as a clear attempt on the part of petitioners to
mislead its office into thinking that respondent no longer had any cause of action against petitioner corporation.
The decision stated, viz.:

WHEREFORE, premises considered, this Office finds respondents GUILTY of illegal dismissal, and hereby ordered
to jointly and severally reinstate complainant back to his former position without loss on seniority rights and
benefits and to pay him his backwages and other benefits from the date he was illegally dismissed up to the time
he is actually reinstated, partially computed as of this date in the amount of ₱258,797.50 (₱39,815.00 x 6.5 mos.)
plus his 13th and 14th month pay in the amount of ₱43,132.91 or in the total amount of ₱301,930.41.

Respondents are also ordered to pay complainant the amount of ₱3,000,000.00 as and by way of moral and
exemplary damages, and to pay complainant the amount equivalent to ten percent (10%) of the total awards as
and by way of attorney’s fees.

SO ORDERED.30

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The Labor Arbiter stated that while petitioner corporation observed the proper procedure in the termination of
an employee for a purported authorized cause, such just cause did not exist in the case at bar. The decision did
not agree with the conclusions reached by petitioner corporation’s own Investigating Panel that while respondent
did not refuse to submit to the questioned drug test and merely "avoided" it on the designated day, "avoidance"
and "refusal" are one and the same. It also held that the terms "avoidance" and "refusal" are separate and distinct
and that "the two words are not even synonymous with each other."31 The Labor Arbiter considered as more
tenable the stance of respondent that his omission merely resulted to a "failure" to submit to the said drug test –
and not an "unjustified refusal." Even if respondent’s omission is to be considered as refusal, the Labor Arbiter
opined that it was not tantamount to "unjustified refusal" which constitutes as just cause for his termination.
Finally, the Labor Arbiter found that respondent was entitled to moral and exemplary damages and attorney’s
fees.

On appeal to the NLRC, petitioners alleged that the decision of the Labor Arbiter was rendered with grave abuse
of discretion for being contrary to law, rules and established jurisprudence, and contained serious errors in the
findings of facts which, if not corrected, would cause grave and irreparable damage or injury to petitioners. The
NLRC, giving weight and emphasis to the inconsistencies in respondent’s explanations, considered his omission as
"unjustified refusal" in violation of petitioner corporation’s drug policy. Thus, in a decision dated May 31, 2006, the
NLRC ruled, viz.:

x x x [Respondent] was duly notified as shown by copy of the notice x x x which he signed to acknowledge receipt
thereof on the said date. [Respondent] did not refute [petitioner corporation’s] allegation that he was also
personally reminded of said drug test on the same day by Ms. Cecilia of [petitioner corporation’s] drug watch
committee. However, [respondent] was nowhere to be found at [petitioner corporation’s] premises at the time
when he was supposed to be tested. Due to his failure to take part in the random drug test, an incident report x x
x was prepared by the Drug Cause Notice x x x to explain in writing why no disciplinary action should be taken
against him for his unjustified refusal to submit to random drug test, a type D offense punishable with
termination. Pursuant to said directive, [respondent] submitted an explanation x x x on 11 November 2004,
pertinent portions of which read:

"I was scheduled for drug test after lunch that day of November 3, 2004 as confirmed with Tina Cecilia. I was
having my lunch when a colleague of my wife abroad called up informing me that there was something wrong
[that] happened in their neighborhood, where a bomb exploded near her workstation. Immediately, I [left] the
office to confirm said information but at around 12:30 P.M. that day, I informed MS. IRENE TORRES, our
Department Secretary[,] that I would be attending to this emergency call. Did even [inform] her that I’ll try to be
back as soon as possible but unfortunately, I was able to return at 6:15 P.M. I didn’t know that Tina was the one
calling me on my cell that day. Did only receive her message after I charged my cell at the office that night. I was
able to call back Tina Cecilia later [that] night if it’s possible to have it (drug test) the next day.

My apology [for] any inconvenience to the Drug Watch Committee, that I forgot everything that day including my
scheduled drug test due to confusion of what had happened. It [was] not my intention not to undergo nor refuse
to have a drug test knowing well that it’s a company policy and it’s mandated by law."

In the course of the investigation, [respondent] was requested to present proof pertaining to the alleged call he
received on 3 November 2004 from a colleague of his wife regarding the bomb explosion in Tel Aviv, his
presence at the Israel Embassy also on 3 November 2004. [Respondent], thereafter, submitted a facsimile which
he allegedly received from his wife's colleague confirming that she called and informed him of the bombing
incident. However, a perusal of said facsimile x x x reveals that the same cannot be given any probative value
because, as correctly observed by [petitioners], it can barely be read and upon inquiry with PLDT, the
international area code of Israel which is 00972 should appear on the face of the facsimile if indeed said facsimile
originated from Israel. [Respondent] also could not present proof of his presence at the Israel Embassy on said
time and date. He instead provided the name of a certain Ms. Eveth Salvador of said embassy who could certify
that he was present thereat. Accordingly, Mr. Bailon, a member of the investigation panel, verified with Ms.
Salvador who told him that she is only the telephone operator of the Israel Embassy and that she was not in a
position to validate [respondent’s] presence at the Embassy. Mr. Bailon was then referred to a certain Ms. Aimee
Zandueta, also of said embassy, who confirmed that based on their records, [respondent] did not visit the

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embassy nor was he attended to by any member of said embassy on 3 November 2004. Ms. Zandueta further
informed Mr. Bailon that no bombing occurred in Tel Aviv on 3 November 2004 and that the only reported
incident of such nature occurred on 1 November 2004. A letter x x x to this effect was written by Consul Ziva
Samech of the Embassy of Israel. A press release x x x of the Department of Foreign Affairs confirm[ed] that the
bombing occurred on 1 November 2004.

In his explanation, the [respondent] stated that the reason why he had to leave the office on 3 November 2004
was to verify an information at the Israel Embassy of the alleged bombing incident on the same day. However,
[petitioners] in their position paper alleged that Ms. Torres of [petitioner] company received a text message from
him at around 12:47 p.m. informing her that he will try to be back since he had a lot of things to do and asking
her if there was a signatory on that day. [Respondent] did not deny sending said text messages to Ms. Torres in
his reply and rejoinder x x x. He actually confirmed that he was involved in the CIIS registration with all companies
that was involved with [petitioner] company and worked on the registration of [petitioner] company’s vehicles
with TRO.

It is also herein noted that [respondent] had initially reported to Ms. Torres that it was his mother in law who
informed him about the problem concerning his wife. However, in his written explanation x x x, the [respondent]
stated that it was a friend of his wife, whom he could not even identify, who informed him of the alleged
bombing incident in Tel Aviv, Israel. [Respondent] also did not deny receiving a cellphone call from Ms. Cecilia
that day. He merely stated that he did not know that it was Ms. Cecilia calling him up in a cellphone and it was
only after he charged his cellphone at the office that night that he received her message. In effect, [respondent]
asserted that his cellphone battery was running low or drained. [Petitioners] were able to refute [these] averments
of [respondent] when they presented [respondent’s] Smart Billing Statement

x x x showing that he was able to make a cellphone call at 5:29 p.m. to [petitioner corporation’s] supplier, Mutico
for a duration of two (2) minutes.32

Given the foregoing facts, the NLRC stated that the offer of respondent to submit to another drug test the
following day, even at his expense, cannot operate to free him from liability. The NLRC opined that taking the
drug test on the day following the scheduled random drug test would affect both the integrity and the accuracy
of the specimen which was supposed to be taken from a randomly selected employee who was notified of his/her
selection on the same day that the drug test was to be administered. The NLRC further asserted that a drug test,
conducted many hours or a day after the employee was notified, would compromise its results because the
employee may have possibly taken remedial measures to metabolize or eradicate whatever drugs s/he may have
ingested prior to the drug test.

The NLRC further stated that these circumstances have clearly established the falsity of respondent’s claims and
found no justifiable reason for respondent to refuse to submit to the petitioner corporation’s random drug test.
While the NLRC acknowledged that it was petitioner corporation’s own Investigating Panel that considered
respondent’s failure to take the required drug test as mere "avoidance" and not "unjustified refusal," it concluded
that such finding was merely recommendatory to guide top management on what action to take.

The NLRC also found that petitioner corporation’s denial of respondent’s motion to reconsider his termination
was in order. Petitioner corporation’s reasons for such denial are quoted in the NLRC decision, viz.:

"Your appeal is anchored on your claim that you responded to an emergency call from someone abroad
informing you that a bomb exploded near the work station of your wife making you unable to undergo the
scheduled drug testing. This claim is groundless taking into account the following:

We are not convinced that there was indeed that call which you claim to have received noon of November 3,
2004. On the contrary, our belief is based on the fact that you could not tell who called you up or how the call
got to you. If you forgot to ask the name of the person who called you up, surely you would have known how the
call came to you. You said you were having lunch at the third floor of the CTC building when you received the
call. There were only two means of communication available to you then: the land line telephone service in your

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office and your mobile phone. If your claim were (sic) not fabricated, you would be able to tell which of these two
was used.

Granting that you indeed received that alleged call, from your own account, there was no compelling reason for
you to act on it at the expense of your scheduled drug testing. The call, as it were, merely stated that ‘something
wrong happened (sic) in their neighborhood, where a bomb exploded near her workstation.’ Nothing was said if
your wife was affected. There is no point in confirming it with extraordinary haste and forego the drug test which
would have taken only a few minutes to accomplish. If at all, you should have undergone the drug testing first
before proceeding to confirm the news so as to leave your mind free from this obligation.

Additionally, if it was indeed necessary that you skip the scheduled drug testing to verify that call, why did you
not ask permission from the Drug Watch [C]ommittee that you were leaving? The place where the activity was
being conducted was very close to your workstation. It was absolutely within your reach to inform any of its
members that you were attending to an emergency call. Why did you not do so?

All this undisputedly proves that you merely eluded the drug testing. Your claim that you did not refuse to be
screened carries no value. Your act was a negation of your words." 33

The NLRC found that respondent was not only validly dismissed for cause – he was also properly accorded his
constitutional right to due process as shown by the following succession of events:

1. On November 8, 2004, respondent was given a show-cause notice requiring him to explain in writing
within three days why no disciplinary action should be taken against him for violation of company policy
on unjustified refusal to submit to random drug testing – a type D offense which results in termination.

2. Respondent submitted his explanation on November 11, 2004.

3. On December 9, 2004, respondent was given a notice of investigation 34 informing him of a meeting on
December 13, 2004 at 9:00 a.m. In this meeting, respondent was allowed to explain his side, present his
evidences and witnesses, and confront the witnesses presented against him.

4. On February 14, 2005, respondent was served a letter of termination which clearly stated the reasons
therefor.35

The NLRC, notwithstanding its finding that respondent was dismissed for cause and with due process, granted
financial assistance to respondent on equitable grounds. It invoked the past decisions of this Court which allowed
the award of financial assistance due to factors such as long years of service or the Court’s concern and
compassion towards labor where the infraction was not so serious. Thus, considering respondent’s 10 years of
service with petitioner corporation without any record of violation of company policies, the NLRC ordered
petitioner corporation to pay respondent financial assistance equivalent to one-half (1/2) month pay for every
year of service in the amount of One Hundred Ninety-Nine Thousand Seventy-Five Pesos (₱199,075.00). The
NLRC decision states thus:

WHEREFORE, the decision dated 31 August 2005 is VACATED and SET ASIDE. The instant complaint is dismissed
for lack of merit. However, respondent Mirant [Philippines] Corp. is ordered to pay complainant financial
assistance in the amount of one hundred ninety-nine thousand seventy five pesos (₱199,075.00).

SO ORDERED.36

Respondent filed a motion for reconsideration, 37 while petitioners filed a motion for partial reconsideration 38 of
the NLRC decision. In a Resolution 39 dated June 30, 2006, the NLRC denied both motions.

In a petition for certiorari before the CA, respondent raised the following issues: whether the NLRC acted without
or in excess of its jurisdiction, or with grave abuse of discretion amounting to lack or excess of its jurisdiction
when it construed that the terms "failure," "avoidance," "refusal" and "unjustified refusal" have similar meanings;
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reversed the factual findings of the Labor Arbiter; and held that respondent deliberately breached petitioner’s
Anti-Drugs Policy.40 Respondent further argued before the appellate court that his failure to submit himself to the
random drug test was justified because he merely responded to an emergency call regarding his wife’s safety in
Tel Aviv, and that such failure cannot be considered synonymous with "avoidance" or "refusal" so as to mean
"unjustified refusal" in order to be meted the penalty of termination. 41

The CA disagreed with the NLRC and ruled that it was immaterial whether respondent failed, refused, or avoided
being tested. To the appellate court, the singular fact material to this case was that respondent did not get
himself tested in clear disobedience of company instructions and policy. Despite such disobedience, however, the
appellate court considered the penalty of dismissal to be too harsh to be imposed on respondent, viz.:

x x x While it is a management prerogative to terminate its erring employee for willful disobedience, the Supreme
Court has recognized that such penalty is too harsh depending on the circumstances of each case. "There must
be reasonable proportionality between, on the one hand, the willful disobedience by the employee and, on the
other hand, the penalty imposed therefor" x x x.

In this case, [petitioner corporation’s] own investigating panel has revealed that the penalty of dismissal is too
harsh to impose on [respondent], considering that this was the first time in his 10-year employment that the latter
violated its company policies. The investigating panel even suggested that a review be had of the company policy
on the term "unjustified refusal" to clearly define what constitutes a violation thereof. The recommendation of the
investigating panel is partially reproduced as follows:

"VII. Recommendation

However, despite having violated the company policy, the panel recommends 4 working weeks suspension
without pay (twice the company policy’s maximum of 2 working weeks suspension) instead of termination due to
the following mitigating circumstances.

1. Mr. Joselito A. Caro did not directly refuse to be subjected to the random drug test scheduled on
November 3, 2004.

2. In the case of Mr. Joselito A. Caro, the two conditions for termination (Unjustified and Refusal) were
not fully met as he expressly agreed to undergo drug test.

3. Mr. Joselito A. Caro voluntarily offered himself to undergo drug test the following day at his own
expense.

Doubling the maximum of 2 weeks suspension to 4 weeks is indicative of the gravity of the offense committed.
The panel believes that although mitigating factors partially offset reasons for termination, the 2 weeks maximum
suspension is too lenient penalty for such an offense.

The Panel also took into consideration that Mr. Joselito A. Caro has served the company for ten (10) years without
any record of violation of the company policies.

xxxx

The Panel also recommends that Management review the Mirant Drug Policy specifically ‘Unjustified [R]efusal to
submit to random drug testing.’ The Panel believes that the term refusal casts certain ambiguities and should be
clearly defined."42

The CA however found that award of moral and exemplary damages is without basis due to lack of bad faith on
the part of the petitioner corporation which merely acted within its management prerogative. In its assailed
Decision dated June 26, 2007, the CA ruled, viz.:

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IN VIEW OF ALL THE FOREGOING, the instant petition is GRANTED. The assailed Decision dated May 31, 2006
and Resolution dated June 30, 2006 rendered by the National Labor Relations Commission (NLRC) in NLRC NCR
CA No. 046551-05 (NCR-00-03-02511-05) are REVERSED and SET ASIDE. The Labor Arbiter’s Decision dated
August 31, 2005 is hereby REINSTATED with MODIFICATION by omitting the award of moral and exemplary
damages as well as attorney’s fees, and that the petitioner’s salary equivalent to four (4) working weeks at the
time he was terminated be deducted from his backwages. No cost.

SO ORDERED.43

Petitioner moved for reconsideration. In its assailed Resolution dated January 11, 2008, the CA denied petitioners’
motion for reconsideration for lack of merit. It ruled that the arguments in the motion for reconsideration were
already raised in their past pleadings.

In this instant Petition, petitioners raise the following grounds:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT FAILED TO CONSIDER THAT:

A. THE PETITION FOR CERTIORARI FILED BY RESPONDENT CARO SHOULD HAVE BEEN SUMMARILY
DISMISSED CONSIDERING THAT IT LACKED THE REQUISITE VERIFICATION AND CERTIFICATION
AGAINST FORUM SHOPPING REQUIRED BY THE RULES OF COURT; OR

B. AT THE VERY LEAST, THE SAID PETITION FOR CERTIORARI FILED BY RESPONDENT CARO SHOULD
HAVE BEEN CONSIDERED MOOT SINCE RESPONDENT CARO HAD ALREADY PREVIOUSLY EXECUTED A
QUITCLAIM DISCHARGING THE PETITIONERS FROM ALL HIS MONETARY CLAIMS.

II. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED QUESTIONS OF SUBSTANCE IN A
WAY NOT IN ACCORDANCE WITH LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT,
CONSIDERING THAT:

A. THE COURT OF APPEALS REVERSED THE DECISION DATED 31 MAY 2006 OF THE NLRC ON THE
GROUND THAT THERE WAS GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION NOTWITHSTANDING THE FACT THAT IT AFFIRMED THE NLRC’S FINDINGS THAT
RESPONDENT CARO DELIBERATELY DISOBEYED PETITIONER MIRANT’S ANTI-DRUGS POLICY.

B. THE PENALTY OF TERMINATION SHOULD HAVE BEEN SUSTAINED BY THE COURT OF APPEALS
GIVEN ITS POSITIVE FINDING THAT RESPONDENT CARO DELIBERATELY AND WILLFULLY DISOBEYED
PETITIONER MIRANT’S ANTI-DRUGS POLICY.

C. IN INVALIDATING RESPONDENT CARO’S DISMISSAL, THE COURT OF APPEALS SUBSTITUTED WITH

ITS OWN DISCRETION A CLEAR MANAGEMENT PREROGATIVE BELONGING ONLY TO PETITIONER
MIRANT IN THE INSTANT CASE.

D. THE WILLFUL AND DELIBERATE VIOLATION OF PETITIONER MIRANT’S ANTI-DRUGS POLICY

AGGRAVATED RESPONDENT CARO’S WRONGFUL CONDUCT WHICH JUSTIFIED HIS TERMINATION.

E. IN INVALIDATING RESPONDENT CARO’S DISMISSAL, THE COURT OF APPEALS, IN EFFECT, BELITTLED

THE IMPORTANCE AND SERIOUSNESS OF PETITIONER MIRANT’S ANTI-DRUGS POLICY AND
CONSEQUENTLY HAMPERED THE EFFECTIVE IMPLEMENTATION OF THE SAME.

F. THE EXISTENCE OF OTHER GROUNDS FOR CARO’S DISMISSAL, SUCH AS WILLFUL DISOBEDIENCE
AND [LOSS] OF TRUST AND CONFIDENCE, JUSTIFIED HIS TERMINATION FROM EMPLOYMENT.

III. NONETHELESS, THE AWARD OF FINANCIAL ASSISTANCE IN FAVOR OF RESPONDENT CARO IS NOT
WARRANTED CONSIDERING THAT RESPONDENT CARO’S WILLFUL AND DELIBERATE REFUSAL TO SUBJECT

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HIMSELF TO PETITIONER MIRANT’S DRUG TEST AND HIS SUBSEQUENT EFFORTS TO CONCEAL THE SAME
SHOWS HIS DEPRAVED MORAL CHARACTER.

IV. THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT HELD PETITIONER BAUTISTA PERSONALLY LIABLE
FOR [RESPONDENT] CARO’S UNFOUNDED CLAIMS CONSIDERING THAT, ASIDE FROM RESPONDENT CARO’S
DISMISSAL BEING LAWFUL, PETITIONER BAUTISTA MERELY ACTED WITHIN THE SCOPE OF HIS FUNCTIONS IN
GOOD FAITH.44

We shall first rule on the issue raised by petitioners that the petition for certiorari filed by respondent with the CA
should have been summarily dismissed as it lacked the requisite verification and certification against forum
shopping under Sections 4 and 5, Rule 7 of the Rules, viz.:

SEC. 4. Verification. – Except when otherwise specifically required by law or rule, pleadings need not be under
oath, verified or accompanied by affidavit.

A pleading is verified by an affidavit that the affiant has read the pleading and that the allegations therein are
true and correct of his knowledge and belief.

A pleading required to be verified which contains a verification based on "information and belief," or upon
"knowledge, information and belief," or lacks a proper verification, shall be treated as an unsigned pleading.

SEC. 5. Certification against forum shopping. – The plaintiff or principal party shall certify under oath in the
complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed thereto and
simultaneously filed therewith: (a) that he has not theretofore commenced any action or filed any claim involving
the same issues in any court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other
action or claim is pending therein; (b) if there is such other pending action or claim, a complete statement of the
present status thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed
or is pending, he shall report that fact within five (5) days therefrom to the court wherein his aforesaid complaint
or initiatory pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or
other initiatory pleading but shall be cause for the dismissal of the case without prejudice, unless otherwise
provided, upon motion and after hearing. The submission of a false certification or noncompliance with any of
the undertakings therein shall constitute indirect contempt of court, without prejudice to the corresponding
administrative and criminal actions. If the acts of the party or his counsel clearly constitute willful and deliberate
forum shopping, the same shall be ground for summary dismissal with prejudice and shall constitute direct
contempt, as well as a cause for administrative sanctions.

It is the contention of petitioners that due to respondent’s failure to subscribe the Verification and Certification of
Non-Forum Shopping before a Notary Public, the said verification and certification cannot be considered to have
been made under oath. Accordingly, such omission is fatal to the entire petition for not being properly verified
and certified. The CA therefore erred when it did not dismiss the petition.

This jurisdiction has adopted in the field of labor protection a liberal stance towards the construction of the rule s
of procedure in order to serve the ends of substantial justice. This liberal construction in labor law emanates from
the mandate that the workingman’s welfare should be the primordial and paramount consideration. 45 Thus, if the
rules of procedure will stunt courts from fulfilling this mandate, the rules of procedure shall be relaxed if the
circumstances of a case warrant the exercise of such liberality. If we sustain the argument of petitioners in the
case at bar that the petition for certiorari should have been dismissed outright by the CA, the NLRC decision
would have reached finality and respondent would have lost his remedy and denied his right to be protected
against illegal dismissal under the Labor Code, as amended.

It is beyond debate that petitioner corporation’s enforcement of its Anti-Drugs Policy is an exercise of its
management prerogative. It is also a conceded fact that respondent "failed" to take the random drug test as
scheduled, and under the said company policy, such failure metes the penalty of termination for the first offense.
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A plain, simple and literal application of the said policy to the omission of respondent would have warranted his
outright dismissal from employment – if the facts were that simple in the case at bar. Beyond debate – the facts
of this case are not – and this disables the Court from permitting a straight application of an otherwise prima
facie straightforward rule if the ends of substantial justice have to be served.

It is the crux of petitioners’ argument that respondent’s omission amounted to "unjust refusal" because he could
not sufficiently support with convincing proof and evidence his defenses for failing to take the random drug test.
For petitioners, the inconsistencies in respondent’s explanations likewise operated to cast doubt on his real
reasons and motives for not submitting to the random drug test on schedule. In recognition of these
inconsistencies and the lack of convincing proof from the point of view of petitioners, the NLRC reversed the
decision of the Labor Arbiter. The CA found the ruling of the Labor Arbiter to be more in accord with the facts,
law and existing jurisprudence.

We agree with the disposition of the appellate court that there was illegal dismissal in the case at bar.

While the adoption and enforcement by petitioner corporation of its Anti-Drugs Policy is recognized as a valid
exercise of its management prerogative as an employer, such exercise is not absolute and unbridled. Managerial
prerogatives are subject to limitations provided by law, collective bargaining agreements, and the general
principles of fair play and justice.46 In the exercise of its management prerogative, an employer must therefore
ensure that the policies, rules and regulations on work-related activities of the employees must always be fair and
reasonable and the corresponding penalties, when prescribed, commensurate to the offense involved and to the
degree of the infraction.47 The Anti-Drugs Policy of Mirant fell short of these requirements.

Petitioner corporation’s subject Anti-Drugs Policy fell short of being fair and reasonable.

First. The policy was not clear on what constitutes "unjustified refusal" when the subject drug policy prescribed
that an employee’s "unjustified refusal" to submit to a random drug test shall be punishable by the penalty of
termination for the first offense. To be sure, the term "unjustified refusal" could not possibly cover all forms of
"refusal" as the employee’s resistance, to be punishable by termination, must be "unjustified." To the mind of the
Court, it is on this area where petitioner corporation had fallen short of making it clear to its employees – as well
as to management – as to what types of acts would fall under the purview of "unjustified refusal." Even petitioner
corporation’s own Investigating Panel recognized this ambiguity, viz.:

The Panel also recommends that Management review the Mirant Drug Policy specifically "Unjustified [R]efusal to
submit to random drug testing." The Panel believes that the term "refusal" casts certain ambiguities and should
be clearly defined.48

The fact that petitioner corporation’s own Investigating Panel and its Vice President for Operations, Sliman,
differed in their recommendations regarding respondent’s case are first-hand proof that there, indeed, is
ambiguity in the interpretation and application of the subject drug policy. The fact that petitioner corporation’s
own personnel had to dissect the intended meaning of "unjustified refusal" is further proof that it is not clear on
what context the term "unjustified refusal" applies to. It is therefore not a surprise that the Labor Arbiter, the
NLRC and the CA have perceived the term "unjustified refusal" on different prisms due to the lack of parameters
as to what comes under its purview. To be sure, the fact that the courts and entities involved in this case had to
engage in semantics – and come up with different constructions – is yet another glaring proof that the subject
policy is not clear creating doubt that respondent’s dismissal was a result of petitioner corporation’s valid exercise
of its management prerogative.

It is not a mere jurisprudential principle, but an enshrined provision of law, that all doubts shall be resolved in
favor of labor. Thus, in Article 4 of the Labor Code, as amended, "[a]ll doubts in the implementation and
interpretation of the provisions of [the Labor] Code, including its implementing rules and regulations, shall be
resolved in favor of labor." In Article 1702 of the New Civil Code, a similar provision states that "[i]n case of doubt,
all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the
laborer." Applying these provisions of law to the circumstances in the case at bar, it is not fair for this Court to
allow an ambiguous policy to prejudice the rights of an employee against illegal dismissal. To hold otherwise and
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sustain the stance of petitioner corporation would be to adopt an interpretation that goes against the very grain
of labor protection in this jurisdiction. As correctly stated by the Labor Arbiter, "when a conflicting interest of
labor and capital are weighed on the scales of social justice, the heavier influence of the latter must be counter-
balanced by the sympathy and compassion the law must accord the underprivileged worker." 49

Second. The penalty of termination imposed by petitioner corporation upon respondent fell short of being
reasonable. Company policies and regulations are generally valid and binding between the employer and the
employee unless shown to be grossly oppressive or contrary to law 50 – as in the case at bar. Recognizing the
ambiguity in the subject policy, the CA was more inclined to adopt the recommendation of petitioner
corporation’s own Investigating Panel over that of Sliman and the NLRC. The appellate court succinctly but
incisively pointed out, viz.:

x x x We find, as correctly pointed out by the investigating panel, that the [petitioner corporation’s] Anti-Drug
Policy is excessive in terminating an employee for his "unjustified refusal" to subject himself to the random drug
test on first offense, without clearly defining what amounts to an "unjustified refusal."

Thus, We find that the recommended four (4) working weeks’ suspension without pay as the reasonable penalty
to be imposed on [respondent] for his disobedience. x x x 51 (Additional emphasis supplied.)

To be sure, the unreasonableness of the penalty of termination as imposed in this case is further highlighted by a
fact admitted by petitioner corporation itself: that for the ten-year period that respondent had been employed by
petitioner corporation, he did not have any record of a violation of its company policies.

As to the other issue relentlessly being raised by petitioner corporation that respondent’s petition for certiorari
before the CA should have been considered moot as respondent had already previously executed a quitclaim
discharging petitioner corporation from all his monetary claims, we cannot agree. Quitclaims executed by
laborers are ineffective to bar claims for the full measure of their legal rights, 52 especially in this case where the
evidence on record shows that the amount stated in the quitclaim exactly corresponds to the amount claimed as
unpaid wages by respondent under Annex A53 of his Reply54 filed with the Labor Arbiter. Prima facie, this creates
a false impression that respondent’s claims have already been settled by petitioner corporation – discharging the
latter from all of respondent’s monetary claims. In truth and in fact, however, the amount paid under the subject
quitclaim represented the salaries of respondent that remained unpaid at the time of his termination – not the
amounts being claimed in the case at bar.

We believe that this issue was extensively discussed by both the Labor Arbiter and the CA and we find no
reversible error on the disposition of this issue, viz.:

A review of the records show that the alluded quitclaim, which was undated and not even notarized although
signed by the petitioner, was for the amount of ₱59,630.05. The said quitclaim was attached as Annex 26 in the
[petitioners’] Position Paper filed before the Labor Arbiter. As fully explained by [respondent] in his Reply filed
with the Labor Arbiter, the amount stated therein was his last pay due to him when he was terminated, not the
amount representing his legitimate claims in this labor suit x x x. To bolster his defense, [respondent] submitted
the pay form issued to him by the [petitioner corporation], showing his net pay at ₱59,630.05 exactly the amount
stated in the quitclaim x x x. Then, too, as stated on the quitclaim itself, the intention of the waiver executed by
the [respondent] was to release [petitioner corporation] from any liability only on the said amount representing
[respondent’s] "full and final payment of [his] last salary/separation pay" x x x. It did not in any way waive
[respondent’s] right to pursue his legitimate claims regarding his dismissal in a labor suit. Thus, We gave no
credence to [petitioners’] private defense that alleged quitclaim rendered the instant petition moot. 55

Finally, the petition avers that petitioner Bautista should not be held personally liable for respondent’s dismissal
as he acted in good faith and within the scope of his official functions as then president of petitioner corporation.
We agree with petitioners.1âwphi1 Both decisions of the Labor Arbiter and the CA did not discuss the basis of the
personal liability of petitioner Bautista, and yet the dispositive portion of the decision of the Labor Arbiter - which
was affirmed by the appellate court - held him jointly and severally liable with petitioner corporation, viz.:

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WHEREFORE, premises considered, this Office finds respondents GUILTY of illegal dismissal, and hereby ordered
to jointly and severally reinstate complainant back to his former position without loss on seniority rights and
benefits and to pay him his backwages and other benefits from the date he was illegally dismissed up to the time
he is actually reinstated, partially computed as of this date in the amount of ₱258,797.50 (₱39,815.00 x 6.5 mos.)
plus his 13th and 14th month pay in the amount of ₱43,132.91 or in the total amount of ₱301,930.41. Respondents
are also ordered to pay complainant the amount of ₱3,000,000.00 as and by way of moral and exemplary
damages, and to pay complainant the amount equivalent to ten percent (10%) of the total awards as and by way
of attorney's fees.

SO ORDERED.56 (Emphasis supplied.)

A corporation has a personality separate and distinct from its officers and board of directors who may only be
held personally liable for damages if it is proven that they acted with malice or bad faith in the dismissal of an
employee.57 Absent any evidence on record that petitioner Bautista acted maliciously or in bad faith in effecting
the termination of respondent, plus the apparent lack of allegation in the pleadings of respondent that petitioner
Bautista acted in such manner, the doctrine of corporate fiction dictates that only petitioner corporation should
be held liable for the illegal dismissal of respondent.

WHEREFORE, the petition for review on certiorari is DENIED. The assailed Decision dated June 26, 2007 and the
Resolution dated January 11, 2008 in CA-G.R. SP No. 96153 are AFFIRMED with the MODIFICATION that only
petitioner corporation is found GUILTY of the illegal dismissal of respondent Joselito A. Caro. Petitioner Edgardo
A. Bautista is not held personally liable as then President of petitioner corporation at the time of the illegal
dismissal.

No pronouncement as to costs.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate Justice

G.R. No. 180416 June 2, 2014

ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA, Petitioners,

vs.
CEZAR T. QUIAMBAO and ERIC C. PILAPIL, Respondents.

DECISION

PEREZ, J.:

This case is a Petition for Review on Certiorari 1 from the Orders2 dated 4 June 2007 and 5 November 2007 of the
Regional Trial Court (RTC), Branch 154, of Pasig City in S.C.A. No. 3047.

The facts:

Background

Strategic Alliance Development Corporation (STRADEC) is a domestic corporation operating as a business

development and investment company.

On 1 March 2004, during the annual stockholder's meeting of STRADEC, petitioner Aderito Z. Yujuico (Yujuico)
was elected as president and chairman of the company.3 Yujuico replaced respondent Cezar T. Quiambao
(Quiambao), who had been the president and chairman of STRADEC since 1994. 4

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With Yujuico at the helm, STRADEC appointed petitioner Bonifacio C. Sumbilla (Sumbilla) as treasurer and one
Joselito John G. Blando (Blando) as corporate secretary. 5 Blando replaced respondent Eric C. Pilapil (Pilapil), the
previous corporate secretary of STRADEC. 6

The Criminal Complaint

On 12 August 2005, petitioners filed a criminal complaint 7 against respondents and one Giovanni T. Casanova
(Casanova) before the Office of the City Prosecutor (OCP) of Pasig City. The complaint was docketed in the OCP
as LS. No. PSG 05-08-07465.

The complaint accuses respondents and Casanova of violating Section 74 in relation to Section 144 of Batas
Pambansa Blg. 68 or the Corporation Code. The petitioners premise such accusation on the following factual
allegations:8

1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly elected president and chairman
of STRADEC-demanded Quiambao for the turnover of the corporate records of the company, particularly
the accounting files, ledgers, journals and other records of the corporation's business. Quiambao refused.

2. As it turns out, the corporate records of STRADEC were in the possession of Casanova-the accountant
of STRADEC. Casanova was keeping custody of the said records on behalf of Quiambao, who allegedly
needed the same as part of his defense in a pending case in court.

3. After the 1 March 2004 stockholders' meeting, Quiambao and Casanova caused the removal of the
corporate records of STRADEC from the company's offices in Pasig City.

4. Upon his appointment as corporate secretary on 21 June 2004, Blando likewise demanded Pilapil for
the turnover of the stock and transfer book of STRADEC. Pilapil refused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and transfer book deposited in
a safety deposit box with Equitable PCI Bank, Kamias Road, Quezon City. Blando acceded to the proposal
and the stock and transfer book was deposited in a safety deposit box with the bank identified. It was
agreed that the safety deposit box may only be opened in the presence of both Quiambao and Blando.

6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock and transfer book from the
safety deposit box and brought it to the offices of the Stradcom Corporation (STRADCOM) in Quezon
City. Quiambao thereafter asked Blando to proceed to the STRADCOM offices. Upon arriving thereat,
Quiambao pressured Blando to make certain entries in the stock and transfer books. After making such
entries, Blando again demanded that he be given possession of the stock and transfer book. Quiambao
refused.

7. On 1 July 2004, Blando received an order dated 30 June 2004 issued by the RTC, Branch 71, of Pasig
City in Civil Case No. 70027, which directed him to cancel the entries he made in the stock and transfer
book. Hence, on even date, Blando wrote letters to Quiambao and Pilapil once again demanding for the
turnover of the stock and transfer book. Pilapil replied thru a letter dated 2 July 2004 where he appeared
to agree to Blando's demand.

8. However, upon meeting with Pilapil and Quiambao, the latter still refused to turnover the stock and
transfer book to Blando. Instead, Blando was once again constrained to agree to a proposal by Pilapil to
have the stock and transfer book deposited with the RTC, Branch 155, of Pasig City. The said court,
however, refused to accept such deposit on the ground that it had no place for safekeeping.

9. Since Quiambao and Pilapil still refused to turnover the stock and transfer book, Blando again acceded
to have the book deposited in a safety deposit box, this time, with the Export and Industry Bank in San
Miguel A venue, Pasig City.

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Petitioners theorize that the refusal by the respondents and Casanova to turnover STRADEC's corporate records
and stock and transfer book violates their right, as stockholders, directors and officers of the corporation, to
inspect such records and book under Section 7 4 of the Corporation Code. For such violation, petitioners
conclude, respondents may be held criminally liable pursuant to Section 144 of the Corporation Code.

Preliminary investigation thereafter ensued.

Resolution of the OCP and the Informations

After receiving the counter-affidavits of the respondents and Casanova, as well as the other documentary
submissions9 by the parties, the OCP issued a Resolution10 dated 6 January 2006 in I.S. No. PSG 05-08-07465. In
the said resolution, the OCP absolved Casanova but found probable cause to hail respondents to court on two (2)
offenses: (1) for removing the stock and transfer book of STRADEC from its principal office, and (2) for refusing
access to, and examination of, the corporate records and the stock and transfer book of STRADEC at its principal
office.

Pursuant to the resolution, two (2) informations 11 were filed against the respondents before the Metropolitan Trial
Court (MeTC) of Pasig City. The informations were docketed as Criminal Case No. 89723 and Criminal Case No.
89724 and were raffled to Branch 69.

Criminal Case No. 89723 is for the offense of removing the stock and transfer book of STRADEC from its principal
office. The information reads:12

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City and within the
jurisdiction of this Honorable Court, the above accused, being then members of the Board of Directors and/or
officers, as the case maybe, of Strategic Alliance Development Corporation (STRADEC, for short), conspiring and
confederating together and mutually helping and aiding one another, did then and there willfully, unlawfully and
feloniously, remove the stock and transfer book of the said STRADEC at its principal office at the 24th Floor, One
Magnificent Mile-CITRA City Bldg., San Miguel A venue, Ortigas Center, Pasig City, where they should all be kept,
in violation of the aforesaid law, and to the prejudice of the said complainants.

Criminal Case No. 89724, on the other hand, covers the offense of refusing access to, and examination of, the
corporate records and the stock and transfer book of STRADEC at its principal office. The information reads: 13

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City, and within the
jurisdiction of this Honorable Court, the above accused, being then members of the Board of Directors and/or
officers, as the case maybe, of Strategic Alliance Development Corporation (STRADEC, for short), conspiring and
confederating together and mutually helping and aiding one another, did then and there willfully, unlawfully and
feloniously, refuse to allow complainants Bonifacio C. Sumbilla and Aderito Z. Yujuico, being then stockholders
and/or directors of STRADEC, access to, and examination of, the corporate records, including the stock and
transfer book, of STRADEC at its principal office at the 24th Floor, One Magnificent Mile-CITRA Bldg., San Miguel
Avenue, Ortigas Center, Pasig City, where they should all be kept, in violation of the aforesaid law, and to the
prejudice of the said complainants.

Urgent Omnibus Motion and the Dismissal of Criminal Case No. 89723

On 18 January 2006, respondents filed before the MeTC an Urgent Omnibus Motion for Judicial Determination of
Probable Cause and To Defer Issuance of Warrants of Arrest (Urgent Omnibus Motion). 14

On 8 May 2006, the MeTC issued an order15 partially granting the Urgent Omnibus Motion. The MeTC dismissed
Criminal Case No. 89723 but ordered the issuance of a warrant of arrest against respondents in Criminal Case No.
89724.

In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in relation to Section 144, of the
Corporation Code only penalizes the act of "refus[ing] to allow any director, trustee, stockholder or member of
Page 129 of 343
the corporation to examine and copy excerpts from the records or minutes of the corporation" 16 and that act is
already the subject matter of Criminal Case No. 89724. Hence, the MeTC opined, Criminal Case No. 89723-which
seeks to try respondents for merely removing the stock and transfer book of STRADEC from its principal office-
actually charges no offense and, therefore, cannot be sustained. 17

Anent directing the issuance of a warrant of arrest in Criminal Case No. 89724, the MeTC found probable cause
to do so; given the failure of the respondents to present any evidence during the preliminary investigation
showing that they do not have possession of the corporate records of STRADEC or that they allowed petitioners
to inspect the corporate records and the stock and transfer book of STRADEC. 18

Unsatisfied, the respondents filed a motion for partial Reconsideration 19 of the 8 May 2006 order of the MeTC
insofar as the disposition in Criminal Case No. 89724 is concerned. The MeTC, however, denied such motion on
16 August 2006.20

Certiorari Petition and the Dismissal of Criminal Case No. 89724 After their motion for partial reconsideration was
denied, respondents filed a certiorari petition, 21 with prayer for the issuance of a temporary restraining order
(TRO), before the RTC of Pasig City on 27 September 2006. The petition was docketed as S.C.A. No. 3047.

On 16 November 2006, the RTC issued a TRO enjoining the MeTC from conducting further proceedings in
Criminal Case No. 89724 for twenty (20) days.22

On 4 June 2007, the R TC issued an Order23 granting respondents' certiorari petition and directing the dismissal
of Criminal Case No. 89724. According to the RTC, the MeTC committed grave abuse of discretion in issuing a
warrant of arrest against respondents in Criminal Case No. 89724.

The RTC found that the finding of probable cause against the respondents in Criminal Case No. 89724 was not
supported by the evidence presented during the preliminary investigation but was, in fact, contradicted by
them:24

1. The R TC noted that, aside from the complaint itself, no evidence was ever submitted by petitioners to
prove that they demanded and was refused access to the corporate records of STRADEC between 1
March to 25 June 2004. What petitioners merely submitted is their letter dated 6 September 2004
demanding from respondents access to the corporate records of STRADEC.

2. The allegations of petitioners in their complaint, as well as 6 September 2004 letter above-mentioned,
however, are contradicted by the sworn statement dated 1 July 2004 of Blando 25 wherein he attested that
as early as 25 June 2004, Pilapil already turned over to him "two binders containing the minutes, board
resolutions, articles of incorporation, copies of contracts, correspondences and other papers of the
corporation, except the stock certificate book and the stock and transfer book."

3. The RTC also took exception to the reason provided by the MeTC in supporting its finding of probable
cause against the respondents. The R TC held that it was not incumbent upon the respondents to
provide evidence proving their innocence. Hence, the failure of the respondents to submit evidence
showing that they do not have possession of the corporate records of STRADEC or that they have
allowed inspection of the same cannot be taken against them much less support a finding of probable
cause against them.

The RTC further pointed out that, at most, the evidence on record only supports probable cause that the
respondents were withholding the stock and transfer book of STRADEC. The RTC, however, opined that refusing
to allow inspection of the stock and transfer book, as opposed to refusing examination of other corporate
records, is not punishable as an offense under the Corporation Code. 26 Hence, the directive of the RTC dismissing
Criminal Case No. 89724.

The petitioners moved for reconsideration, 27 but the R TC remained steadfast.28

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Hence, this petition by petitioners.

The Instant Petition

In their petition, petitioners claim that Criminal Case No. 89724 may still be sustained against the respondents
insofar as the charge of refusing to allow access to the stock and transfer book of STRADEC is concerned. They
argue that the R TC made a legal blunder when it held that the refusal to allow inspection of the stock and
transfer book of a corporation is not a punishable offense under the Corporation Code. Petitioners contend that
such a refusal still amounts to a violation of Section 74 of the Corporation Code, for which Section 144 of the
same code prescribes a penalty.

OUR RULING

The RTC indeed made an inaccurate pronouncement when it held that the act of refusing to allow inspection of
the stock and transfer book of a corporation is not a punishable offense under the Corporation Code. Such
refusal, when done in violation of Section 74(4) of the Corporation Code, properly falls within the purview of
Section 144 of the same code and thus may be penalized as an offense.

The foregoing gaffe nonetheless, We still sustain the dismissal of Criminal Case No. 89724 as against the
respondents.

A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records and
the stock and transfer book of a corporation under the second and fourth paragraphs of Section 74 of the
Corporation Code-such as Criminal Case No. 89724--can only be maintained against corporate officers or any
other persons acting on behalf of such corporation. The submissions of the petitioners during the preliminary
investigation, however, clearly suggest that respondents are neither in relation to STRADEC.

Hence, we deny the petition.

The act of ref using to allow inspection of the

stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.

We first address the inaccurate pronouncement of the RTC.

Section 74 is the provision of the Corporation Code that deals with the books a corporation is required to keep. It
reads:

Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its
principal office a record of all business transactions and minutes of all meetings of stockholders or members, or
of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the
meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those
present and absent, and every act done or ordered done at the meeting. Upon the demand of any director,
trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion
or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member
on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be open to
inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business
days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

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Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of
the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of
this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be
guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further,
That it shall be a defense to any action under this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in
good faith or for a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book'', in which must be kept a
record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as
the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or
in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a
stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities
and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable
annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own
stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a
license fee herein provided, shall be applicable. (5 la and 32a; P.B. No. 268.) (Emphasis supplied)

Section 144 of the Corporation Code, on the other hand, is the general penal provision of the Corporation Code.
It reads:

Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (₱1,000.00)
pesos but not more than ten thousand (₱10,000.00) pesos or by imprisonment for not less than thirty (30) days
but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a
corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of
appropriate action against the director, trustee or officer of the corporation responsible for said violation:
Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a
corporation provided in this Code. (190 112 a) (Emphasis supplied)

In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow inspection of the stock and
transfer book, even though it may be a violation of Section 74(4), is not punishable as an offense under the
Corporation Code.29 In justifying this conclusion, the RTC seemingly relied on the fact that, under Section 7 4 of
the Corporation Code, the application of Section 144 is expressly mentioned only in relation to the act of
"refus[ing] to allow any director, trustees, stockholder or member of the corporation to examine and copy
excerpts from [the corporation's] records or minutes" that excludes its stock and transfer book.

We do not agree.

While Section 74 of the Corporation Code expressly mentions the application of Section 144 only in relation to
the act of "refus[ing] to allow any director, trustees, stockholder or member of the corporation to examine and
copy excerpts from [the corporation's] records or minutes," the same does not mean that the latter section no
longer applies to any other possible violations of the former section.

It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any provision" of the
Corporation Code "not otherwise specifically penalized therein." Hence, we find inconsequential the fact that that
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Section 74 expressly mentions the application of Section 144 only to a specific act, but not with respect to the
other possible violations of the former section.

Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be made to apply to
violations of the right of a stockholder to inspect the stock and transfer book of a corporation under Section 74(4)
given the already unequivocal intent of the legislature to penalize violations of a parallel right, i.e., the right of a
stockholder or member to examine the other records and minutes of a corporation under Section 74(2). Certainly,
all the rights guaranteed to corporators under Section 7 4 of the Corporation Code are mandatory for the
corporation to respect. All such rights are just the same underpinned by the same policy consideration of keeping
public confidence in the corporate vehicle thru an assurance of transparency in the corporation's operations.

Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to allow inspection of the stock
and transfer book is not a punishable offense under the Corporation Code. Such refusal, when done in violation
of Section 74(4) of the Corporation Code, properly falls within the purview of Section 144 of the same code and
thus may be penalized as an offense.

A criminal action based on the violation of a

stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.

The foregoing notwithstanding, and independently of the reasons provided therefor by the RTC, we sustain the
dismissal of Criminal Case No. 89724.

Criminal Case No. 89724 accuses respondents of denying petitioners' right to examine or inspect the corporate
records and the stock and transfer book of STRADEC. It is thus a criminal action that is based on the violation of
the second and fourth paragraphs of Section 7 4 of the Corporation Code.

A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the same section,
reveal that they are provisions that obligates a corporation: they prescribe what books or records a corporation is
required to keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or members in relation to such books
and records.1âwphi1 Hence, by parity of reasoning, the second and fourth paragraphs of Section 74, including the
first paragraph of the same section, can only be violated by a corporation.

It is clear then that a criminal action based on the violation of the second or fourth paragraphs of Section 74 can
only be maintained against corporate officers or such other persons that are acting on behalf of the corporation.
Violations of the second and fourth paragraphs of Section 74 contemplates a situation wherein a corporation,
acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes
and the stock and transfer book of such corporation.

The problem with the petitioners' complaint and the evidence that they submitted during preliminary
investigation is that they do not establish that respondents were acting on behalf of STRADEC. Quite the contrary,
the scenario painted by the complaint is that the respondents are merely outgoing officers of STRADEC who, for
some reason, withheld and refused to turn-over the company records of STRADEC; that it is the petitioners who
are actually acting on behalf of STRADEC; and that STRADEC is actually merely trying to recover custody of the
withheld records.

In other words, petitioners are not actually invoking their right to inspect the records and the stock and transfer
book of STRADEC under the second and fourth paragraphs of Section 74. What they seek to enforce is the
Page 133 of 343
proprietary right of STRADEC to be in possession of such records and book. Such right, though certainly legally
enforceable by other means, cannot be enforced by a criminal prosecution based on a violation of the second
and fourth paragraphs of Section 74. That is simply not the situation contemplated by the second and fourth
paragraphs of Section 74 of the Corporation Code.

For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of probable cause.

WHEREFORE, premises considered, the petlt10n is hereby DENIED. The Orders dated 4 June 2007 and 5
November 2007 of the Regional Trial Court, Branch 154, of Pasig City in S.C.A. No. 3047, insofar as said orders
effectively dismissed Criminal Case No. 89724 pending before Metropolitan Trial Court, Branch 69, of Pasig City,
are hereby AFFIRMED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:

G.R. No. 161759 July 2, 2014

COMMISSIONER OF CUSTOMS, Petitioner,

vs.
OILINK INTERNATIONAL CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This appeal is brought by the Commissioner of Customs to seek the review and reversal of the decision
promulgated on September 29, 2003,1 whereby the Court of Appeals (CA) affirmed the adverse ruling of the
Court of Tax Appeals (CTA) declaring the assessment for deficiency taxes and duties against Oilink International
Corporation (Oilink) null and void.

Antecedents

The antecedents are summarized in the assailed decision. 2

On September 15, 1966, Union Refinery Corporation (URC) was established under the Corporation Code of the
Philippines. In the course of its business undertakings, particularly in the period from 1991 to 1994, URC imported
oil products into the country.

On January 11, 1996, Oilink was incorporated for the primary purpose of manufacturing, importing, exporting,
buying, selling or dealing in oil and gas, and their refinements and by-products at wholesale and retail of
petroleum. URC and Oilink had interlocking directors when Oilink started its business.

In applying for and in expediting the transfer of the operator’s name for the Customs Bonded Warehouse
thenoperated by URC, Esther Magleo, the Vice-President and General Manager of URC, sent a letter dated
January 15, 1996 to manifest that URC and Oilink had the same Board of Directors and that Oilink was 100%
owned by URC.

On March 4, 1998, Oscar Brillo, the District Collector of the Port of Manila, formally demanded that URC pay the
taxes and duties on its oil imports that had arrived between January 6, 1991 and November 7, 1995 at the Port of
Lucanin in Mariveles, Bataan.

Page 134 of 343

On April 16, 1998, Brillo made another demand letter to URC for the payment of the reduced sum of
₱289,287,486.60 for the Value-Added Taxes (VAT), special duties and excisetaxes for the years 1991-1995.

On April 23, 1998, URC, through its counsel, responded to the demands by seeking the landed computations of
the assessments, and challenged the inconsistencies of the demands.

On November 25, 1998, then Customs Commissioner Pedro C. Mendoza formally directed that URC pay the
amount of ₱119,223,541.71 representing URC’s special duties, VAT,and Excise Taxes that it had failed to pay at the
time of the release of its 17 oil shipments that had arrived in the Sub-port of Mariveles from January 1, 1991 to
September 7, 1995.

On December 21, 1998, Commissioner Mendoza wrote again to require URC to pay deficiency taxes but in the
reduced sum of ₱99,216,580.10.

On December 23, 1998, upon his assumption of office, Customs Commissioner Nelson Tan transmitted another
demand letter to URC affirming the assessment of ₱99,216,580.10 by Commissioner Mendoza.

On January 18, 1999, Magleo, in behalf of URC, replied by letter to Commissioner Tan’s affirmance by denying
liability, insisting instead that only ₱28,933,079.20 should be paid by way of compromise.

On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s proposal, and directed URC to pay
₱99,216,580.10.

On May 24, 1999, Manuel Co, URC’s President, conveyed to Commissioner Tan URC’s willingness to pay only
₱94,216,580.10, of which the initial amount of ₱28,264,974.00 would be taken from the collectibles of Oilink from
the National Power Corporation, and the balance to be paid in monthly installments over a period ofthree years
to be secured with corresponding post-dated checks and its future available tax credits.

On July 2, 1999, Commissioner Tan made a final demand for the total liability of ₱138,060,200.49 upon URC and
Oilink.

On July 8, 1999, Co requested from Commissioner Tan a complete finding of the facts and law in support ofthe
assessment made in the latter’s July 2, 1999 final demand.

Also on July 8, 1999, Oilink formally protested the assessment on the ground that it was not the party liable for
the assessed deficiency taxes.

On July 12, 1999, after receiving the July 8, 1999 letter from Co, Commissioner Tan communicated in writing the
detailed computation of the tax liability, stressing that the Bureau of Customs (BoC) would not issue any
clearance to Oilink unless the amount of ₱138,060,200.49 demanded as Oilink’s tax liability befirst paid, and a
performance bond be posted by URC/Oilink to secure the payment of any adjustments that would result from the
BIR’s review of the liabilities for VAT, excise tax, special duties, penalties, etc.

Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the assessment for having been
issued without authority and with grave abuse of discretion tantamount to lack of jurisdiction because the
Government was thereby shifting the imposition from URC to Oilink.

Decision of the CTA

On July 9, 2001, the CTA rendered its decision declaring as null and void the assessment of the Commissioner of
Customs, to wit:

IN THE LIGHT OF ALL THE FOREGOING, the petition is hereby GRANTED. The assailed assessment issued by
Respondent against herein Petitioner OILINK INTERNATIONAL CORPORATION is hereby declared NULL and
VOID.
Page 135 of 343
SO ORDERED.3

The Commissioner of Customs seasonably filed a motion for reconsideration, 4 but the CTA denied the motion for
lack of merit.5

Judgment of the CA

Aggrieved, the Commissioner of Customs brought a petition for review in the CA upon the following issues,
namely: (a) the CTA gravely erred in holding that it had jurisdiction over the subject matter; (b) the CTA gravely
erred in holding that Oilink had a cause of action; and (c) the CTA gravely erred in holding that the Commissioner
of Customs could not pierce the veil of corporate fiction.

On the issue of the jurisdiction of the CTA, the CA held:

x x x the case at bar is very much within the purview of the jurisdiction of the Court ofTax Appeals since it is
undisputed that what is involved herein is the respondent’s liability for payment of money to the Government as
evidenced by the demand letters sent by the petitioner. Hence, the Court of Tax Appeals did noterr in taking
cognizance of the petition for review filed by the respondent.

xxxx

We find the petitioner’s submission untenable. The principle of non-exhaustion of administrative remedy is not an
iron-clad rule for there are instances that immediate resort to judicial action may be proper. Verily, a cursory
examination of the factual milieu of the instant case indeed reveals that exhaustion ofadministrative remedy
would be unavailing because it was the Commissioner of Customs himself who was demanding from the
respondent payment of tax liability. In addition, it may be recalled that a crucial issue inthe petition for review
filed by the respondent before the CTA is whether or not the doctrine of piercing the veil of corporate fiction
validly applies. Indubitably, this is purely a question of law where judicial recourse may certainly be resorted to. 6

As to whether or not the Commissioner of Customs could lawfully pierce the veil of corporate fiction in order to
treat Oilink as the mere alter ego of URC, the CA concurred with the CTA, quoting the latter’s following findings:

In the case at bar, the said wrongdoing was not clearly and convincingly established by Respondent. He did not
submit any evidence to support his allegations but merely submitted the case for decision based on the
pleadings and evidence presented by petitioner. Stated otherwise, should the Respondent sufficiently provethat
OILINK was merely set up in order to avoid the payment of taxes or for some other purpose which will defeat
public convenience, justify wrong, protect fraud or defend crime, this Court will not hesitate to pierce the veil of
corporate fiction by URC and OILINK.7

Issues

Hence, this appeal, whereby the Commissioner of Customs reiterates the issues raised in the CA.

Ruling of the Court

We affirm the judgment of the CA.

1.

The CTA had jurisdiction over the controversy

There is no question that the CTA had the jurisdiction over the case. Republic Act No. 1125, the law creating the
CTA, defined the appellate jurisdiction of the CTA as follows:

Page 136 of 343

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by
appeal, as herein provided:

xxxx

2. Decisions of the Commissioner ofCustoms in cases involving liability for Customs duties, fees or other money
charges; seizure, detention or release of property affected; fines, forfeitures or other penalties imposed in relation
thereto;or other matters arising under the Customs Law or other law or part of law administered by the Bureau of
Customs;

xxxx

Nonetheless, the Commissioner of Customs contends that the CTA should not take cognizance of the
casebecause of the lapse of the 30-day period within which to appeal, arguing that on November 25, 1998 URC
had already received the BoC’s final assessment demanding payment of the amount due within 10 days, but filed
the petition only on July 30, 1999.8

We rule against the Commissioner of Customs. The CTA correctly ruled that the reckoning date for Oilink’s appeal
was July 12, 1999, not July 2, 1999, because it was on the former date that the Commissioner of Customs denied
the protest of Oilink.Clearly, the filing of the petition on July 30, 1999 by Oilink was well within its reglementary
period to appeal. The insistence by the Commissioner of Customs on reckoning the reglementary period to
appeal from November 25, 1998, the date when URC received the final demand letter, is unwarranted. We note
that the November 25, 1998 final demand letter of the BoC was addressed to URC, not to Oilink. As such, the final
demand sentto URC did not bind Oilink unless the separate identities of the corporations were disregarded in
order to consider them as one.

2.

Oilink had a valid cause of action

The Commissioner of Customs positsthat the final demand letter dated July 2, 1999 from which Oilink appealed
was not the final "action" or "ruling" from which an appeal could be taken as contemplated by Section 2402 of
the Tariff and Customs Code; that what Section 7 of RA No. 1125 referred to as a decision that was appealable to
the CTA was a judgment or order of the Commissioner of Customs that was final in nature, not merely an
interlocutory one; that Oilink did notexhaust its administrative remedies under Section 2308 of the Tariff and
Customs Code by paying the assessment under protest; that only when the ensuing decision of the Collector and
then the adverse decision of the Commissioner of Customs would it be proper for Oilink to seek judicial relief
from the CTA; and that, accordingly, the CTA should have dismissed the petition for lack of cause of action.

The position of the Commissioner of Customs lacks merit.

The CA correctly held that the principle of non-exhaustion of administrative remedies was not an iron-clad rule
because there were instances in which the immediate resort to judicial action was proper. This was one such
exceptional instance when the principle did not apply. As the records indicate, the Commissioner of Customs
already decided to deny the protest by Oilink on July 12, 1999, and stressed then that the demand to pay was
final. In that instance, the exhaustion of administrative remedies would have been an exercise in futility because it
was already the Commissioner of Customs demanding the payment of the deficiency taxes and duties.

3.

There was no ground to pierce

the veil of corporate existence

Page 137 of 343

A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those
of the persons composing it as well as from any other legal entity to which it may be related. For this reason, a
stockholder is generally not made to answer for the acts or liabilities of the corporation, and viceversa. The
separate and distinct personality of the corporation is, however, a mere fiction established by law for convenience
and to promote the ends of justice. It may not be used or invoked for ends that subvert the policy and purpose
behind its establishment, or intended by law to which the corporation owes its being. This is true particularly
when the fiction is used to defeat public convenience, to justify wrong, to protectfraud, to defend crime, to
confuse legitimate legal or judicial issues, to perpetrate deception or otherwise to circumvent the law. This is
likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity. In such instances, the veil of corporate entity will be
pierced or disregarded with reference to the particular transaction involved. 9

In Philippine National Bank v. Ritratto Group, Inc.,10 the Court has outlined the following circumstances thatare
useful in the determination of whether a subsidiary is a mere instrumentality of the parent-corporation, viz:

1. Control, not mere majority or complete control, but complete domination, not only of finances butof policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separatemind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a
statutory or other positive legal duty, or dishonest and, unjust act incontravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

In applying the "instrumentality" or"alter ego" doctrine, the courts are concerned with reality, not form, and with
how the corporation operated and the individual defendant's relationship to the operation. 11 Consequently, the
absence of any one of the foregoing elements disauthorizes the piercing of the corporate veil.

Indeed, the doctrine of piercing the corporate veil has no application here because the Commissioner of Customs
did not establish that Oilink had been set up to avoid the payment of taxes or duties, or for purposes that would
defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues,
perpetrate deception or otherwise circumvent the law. It is also noteworthy that from the outset the
Commissioner of Customs sought to collect the deficiency taxes and duties from URC, and that it was only on July
2, 1999 when the Commissioner of Customs sent the demand letter to both URC and Oilink. That was revealing,
because the failure of the Commissioner of Customs to pursue the remedies against Oilink from the outset
manifested that its belated pursuit of Oilink was only an afterthought. WHEREFORE, the Court AFFIRMS the
decision promulgated by the Court of Appeals on September 29, 2003.

No pronouncement on costs of suit.

SO ORDERED.

LUCAS P. BERSMAIN
Associate Justice

G.R. No.197530 July 9, 2014

ABOITIZ EQUITY VENTURES, INC., Petitioner,

vs.
VICTOR S. CHIONGBIAN, BENJAMIN D. GOTHONG, and CARLOS A. GOTHONG LINES, INC. (CAGLI),Respondents.

DECISION

LEONEN, J.:

Page 138 of 343

This is a petition for review on certiorari with an application for the issuance of a temporary restraining order
and/or writ of preliminary injunction under Rule 45 of the Rules of Court. This petition prays that the assailed
orders dated May 5, 20111 and June 24, 20112 of the Regional Trial Court, Cebu City, Branch 10 in Civil Case No.
CEB-37004 be nullified and set aside and that judgment be rendered dismissing with prejudice the
complaint3 dated July 20, 2010 filed by respondents Carlos A. Gothong Lines, Inc. ("CAGLI") and Benjamin D.
Gothong. On January 8, 1996, Aboitiz Shipping Corporation ("ASC"), principally owned by the Aboitiz family,
CAGLI, principally owned by the Gothong family, and William Lines, Inc.("WLI"), principally owned by the
Chiongbian family, entered into anagreement (the "Agreement"), 4 whereby ASC and CAGLI would transfer their
shipping assets to WLI in exchange for WLI’s shares of stock. 5 WLI, in turn, would run their merged shipping
businesses and, henceforth, be known as WG&A, Inc. ("WG&A"). 6

Sec. 11.06 of the Agreement required all disputes arising out of or in connection with the Agreement tobe settled
by arbitration:

11.06 Arbitration

All disputes arising out of or in connection with this Agreement including any issue as to this Agreement’s validity
or enforceability, which cannot be settled amicably among the parties, shall be finally settled by arbitration in
accordance with the Arbitration Law (Republic Act No. 876) by an arbitration tribunal composed of four (4)
arbitrators. Each of the parties shall appoint one (1) arbitrator, the three (3) to appoint the fourth arbitrator who
shall act as Chairman. Any award by the arbitration tribunal shall be final and binding upon the parties and shall
be enforced by judgment of the Courts of Cebu or Metro Manila. 7

Among the attachments to the Agreement was Annex SL-V.8 This was a letter dated January 8,1996, from WLI,
through its President (herein respondent) Victor S. Chiongbian addressed to CAGLI, through its Chief Executive
Officer Bob D. Gothong and Executive Vice President for Engineering (herein respondent) Benjamin D. Gothong.
On its second page, Annex SL-V bore the signatures ofBob D. Gothong and respondent Benjamin D. Gothong by
way of a conforme on behalf of CAGLI.

Annex SL-V confirmed WLI’s commitment to acquire certain inventories of CAGLI. These inventories would havea
total aggregate value of, at most, ₱400 million, "as determinedafter a special examination of the
[i]nventories."9Annex SL-V also specificallystated that such acquisition was "pursuant to the Agreement." 10

The entirety of Annex SL-V’s substantive portion reads:

We refer to the Agreement dated January 8, 1996 (the "Agreement") among William Lines, Inc. ("Company C"),
Aboitiz Shipping Corporation ("Company A") and Carlos A. Gothong Lines, Inc. ("Company B") regarding the
transfer of various assets of Company A and Company B to Company C in exchangefor shares of capital stock of
Company C. Terms defined in the Agreement are used herein as therein defined.

This will confirm our commitment to acquire certain spare parts and materials inventory (the "Inventories") of
Company B pursuant to the Agreement.

The total aggregate value of the Inventories to be acquired shall not exceed ₱400 Million as determined after a
special examination of the Inventories as performed by SGV & Co. to be completed on or before the Closing Date
under the agreed procedures determined by the parties.

Subject to documentation acceptable to both parties, the Inventories to be acquired shall be determined not later
than thirty (30) days after the Closing Date and the payments shall be made in equal quarterly instalments over a
period of two years with the first payment due on March 31, 1996. 11

Pursuant to Annex SL-V, inventories were transferred from CAGLI to WLI. These inventories were assessed to have
a value of 514 million, which was later adjusted to 558.89 million. 12 Of the total amount of 558.89 million,
"CAGLIwas paid the amount of 400 Million." 13 In addition to the payment of 400 million,petitioner Aboitiz Equity
Ventures ("AEV") noted that WG&A shares with a book value of 38.5 million were transferred to CAGLI. 14
Page 139 of 343
As there was still a balance, in2001, CAGLI sent WG&A (the renamed WLI) demand letters "for the return of or the
payment for the excess [i]nventories."15 AEV alleged that to satisfy CAGLI’s demand, WLI/WG&A returned
inventories amounting to 120.04 million.16 As proof of this, AEV attached copies of delivery receipts signed by
CAGLI’s representatives as Annex "K" of the present petition.17

Sometime in 2002, the Chiongbian and Gothong families decided to leave the WG&A enterprise and sell their
interest in WG&A to the Aboitiz family. As such, a share purchase agreement18 ("SPA") was entered into by
petitioner AEV and the respective shareholders groups of the Chiongbians and Gothongs. In the SPA, AEV
agreedto purchase the Chiongbian group's 40.61% share and the Gothong group's 20.66% share in WG&A’s
issued and outstanding stock.19

Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising from the SPA. It reads:

6.5 Arbitration. Should there be any dispute arising between the parties relating to this Agreement including the
interpretation or performance hereof which cannot beresolved by agreement of the parties within fifteen (15)
days after written notice by a party to another, such matter shall then be finally settled by arbitration in Cebu City
in accordance with the Philippine Arbitration Law. Substantive aspects of the dispute shall be settled by applying
the laws of the Philippines. The decision of the arbitrators shall be final and binding upon the parties hereto and
the expense of arbitration (including without limitation the award of attorney’s fees to the prevailing party) shall
be paid as the arbitrators shall determine. 20

Section 6.8 of the SPA further provided that the Agreement (of January 8, 1996) shall be deemed terminated
except its Annex SL-V. It reads:

6.8 Termination of Shareholders Agreement. The Buyer and the Sellers hereby agree that on Closing, the
Agreement among Aboitiz Shipping Corporation, Carlos A. Gothong Lines, Inc. and William Lines, Inc. dated
January 8, 1996, as the same has been amended from time to time (the "Shareholders’ Agreement") shall all be
considered terminated, except with respect to such rights and obligations that the parties to the Shareholders’
Agreement have under a letter dated January 8, 1996 (otherwise known as "SL-V") from William Lines, Inc. to
Carlos A. Gothong Lines, Inc. regarding certain spare parts and materials inventory, which rights and obligations
shall survive through the date prescribed by the applicable statute of limitations.21

As part of the SPA, the parties entered into an Escrow Agreement 22 whereby ING Bank N.V.-Manila Branch was to
take custody of the shares subject of the SPA. 23 Section 14.7 of the Escrow Agreement provided that all disputes
arising from it shall be settled through arbitration:

14.7 All disputes, controversies or differences which may arise by and among the parties hereto out of, or in
relation to, or in connection with this Agreement, orfor the breach thereof shall be finally settled by arbitration in
Cebu City in accordance with the Philippine Arbitration Law. The award rendered by the arbitrator(s) shall be final
and binding upon the parties concerned. However, notwithstanding the foregoing provision, the parties reserve
the right to seek redress before the regular court and avail of any provisional remedies in the event of any
misconduct, negligence, fraud or tortuous acts which arise from any extra-contractual conduct that affects the
ability ofa party to comply with his obligations and responsibilities under this Agreement. 24

As a result of the SPA, AEV became a stockholder of WG&A. Subsequently, WG&A was renamed Aboitiz
Transport Shipping Corporation ("ATSC").25

Petitioner AEV alleged that in2008, CAGLI resumed making demands despite having already received 120.04
million worth of excess inventories.26 CAGLI initially made its demand to ATSC (the renamed WLI/WG&A) through
a letter27 dated February 14, 2008. As alleged by AEV, however, CAGLI subsequently resorted to a "shotgun
approach"28 and directed its subsequent demand letters to AEV 29 as well as to FCLC30 (a company related to
respondent Chiongbian).

Page 140 of 343

AEV responded to CAGLI’s demands through several letters. 31 In these letters, AEV rebuffed CAGLI's demands
noting that: (1) CAGLI already received the excess inventories;(2) it was not a party to CAGLI's claim as it had a
personality distinct from WLI/WG&A/ATSC; and (3) CAGLI's claim was already barred by prescription.

In a reply-letter32 dated May 5, 2008, CAGLI claimed that it was unaware of the delivery to it of the excess
inventories and asked for copies of the corresponding delivery receipts. 33 CAGLI threatened that unless it received
proof of payment or return ofexcess inventories having been made on or before March 31, 1996, it would pursue
arbitration.34

In letters written for AEV (the first dated October 16, 2008 by Aboitiz and Company, Inc.’s Associate General
Counsel Maria Cristina G. Gabutina 35 and the second dated October 27, 2008 by SyCip Salazar Hernandez and
Gatmaitan36), it was noted that the excess inventories were delivered to GT Ferry Warehouse. 37 Attached to these
letters were a listing and/or samples 38 of the corresponding delivery receipts. In these letters it was also noted
that the amount of excess inventories delivered (120.04 million) was actually in excess of the value of the
supposedly unreturned inventories (119.89 million). 39 Thus, it was pointed out that it was CAGLI which was liable
to return the difference between 120.04 million and 119.89 million.40 Its claims not having been satisfied, CAGLI
filed on November 6, 2008 the first of two applications for arbitration ("first complaint")41 against respondent
Chiongbian, ATSC, ASC, and petitioner AEV, before the Cebu City Regional Trial Court, Branch 20. The first
complaint was docketed as Civil Case No. CEB-34951.

In response, AEV filed a motion to dismiss 42 dated February 5, 2009. AEV argued that CAGLI failed to state a
cause of action as there was no agreement to arbitrate between CAGLI and AEV. 43 Specifically, AEV pointed out
that: (1) AEV was never a party to the January 8, 1996 Agreement or to its Annex SL-V;44 (2) while AEV is a party to
the SPA and Escrow Agreement, CAGLI's claim had no connection to either agreement; (3) the unsigned and
unexecuted SPA attached to the complaint cannot be a source of any right to arbitrate; 45 and (4) CAGLI did not
say how WLI/WG&A/ATSC's obligation to return the excess inventories can be charged to AEV.

On December 4, 2009, the Cebu City Regional Trial Court, Branch 20 issued an order 46 dismissing the first
complaint with respect to AEV. It sustained AEV’s assertion that there was no agreement binding AEV and CAGLI
to arbitrate CAGLI’s claim.47 Whether by motion for reconsideration, appeal or other means, CAGLI did not
contest this dismissal.

On February 26, 2010, the Cebu CityRegional Trial Court, Branch 20 issued an order 48 directing the parties
remaining in the first complaint (after the discharge of AEV) to proceed with arbitration.

The February 26, 2010 order notwithstanding, CAGLI filed a notice of dismissal 49 dated July 8, 2010, withdrawing
the first complaint. In an order50 dated August 13, 2010, the Cebu City Regional Trial Court, Branch 20 allowed this
withdrawal.

ATSC (the renamed WLI/WG&A) filed a motion for reconsideration 51 dated September 20, 2010 to the allowance
of CAGLI's notice of dismissal. This motion was denied in an order 52 dated April 15, 2011.

On September 1, 2010, while the first complaint was still pending (n.b., it was only on April 15, 2011 that the Cebu
City Regional Trial Court, Branch 20 denied ATSC’s motion for reconsideration assailing the allowance of CAGLI’s
notice of disallowance), CAGLI, now joined by respondent Benjamin D. Gothong, filed a second application for
arbitration ("second complaint")53 before the Cebu City Regional Trial Court, Branch 10. The second complaint was
docketed as Civil Case No. CEB-37004 and was also in view of the return of the same excess inventories subject of
the first complaint.

On October 28, 2010, AEV filed a motion to dismiss 54 the second complaint on the following grounds: 55 (1) forum
shopping; (2) failure to state a cause of action; (3) res judicata; and (4) litis pendentia.

In the first of the two (2) assailed orders dated May 5, 2011, 56 the Cebu City Regional Trial Court, Branch 10 denied
AEV's motion to dismiss.

Page 141 of 343

On the matter of litis pendentia, the Regional Trial Court, Branch 10 noted that the first complaint was dismissed
with respect to AEV on December 4, 2009, while the second complaint was filed on September 1, 2010. As such,
the first complaint was no longer pending at the time of the filing of the second complaint. 57 On the matter of res
judicata, the trial court noted that the dismissal without prejudice of the first complaint "[left] the parties free to
litigate the matter in a subsequent action, as though the dismiss[ed] action had not been commenced." 58 It added
that since litis pendentia and res judicata did not exist, CAGLI could not be charged with forum shopping. 59 On
the matter of an agreement to arbitrate, the Regional Trial Court, Branch 10 pointed to the SPA as "clearly
express[ing] the intention of the parties to bring to arbitration process all disputes, if amicable settlement
fails."60 It further dismissed AEV’s claim that it was not a party to the SPA, as "already touching on the merits of
the case"61 and therefore beyond its duty "to determine if they should proceed to arbitration or not." 62

In the second assailed order63 dated June 24, 2011, the Cebu City Regional Trial Court, Branch 10 deniedAEV's
motion for reconsideration.

Aggrieved, AEV filed the present petition.64 AEV asserts that the second complaint is barred by res judicata and
litis pendentia and that CAGLI engaged in blatant forum shopping. 65 It insists that it is not bound by an
agreement to arbitrate with CAGLI and that, even assuming that it may be required to arbitrate, it is being
ordered to do so under terms that are "manifestly contrary to the . . . agreements on which CAGLI based its
demand for arbitration."66

For resolution are the following issues:

I. Whether the complaint in Civil Case No. CEB-37004 constitutes forum shopping and/or is barred by res judicata
and/or litis pendentia

II. Whether petitioner, Aboitiz Equity Ventures, Inc., is bound by an agreement to arbitrate with Carlos A. Gothong
Lines, Inc., with respect to the latter’s claims for unreturned inventories delivered to William Lines, Inc./WG&A,
Inc./Aboitiz Transport System Corporation

AEV availed of the wrong

remedy in seeking relief from
this court

Before addressing the specific mattersraised by the present petition, we emphasize that AEV is in error inseeking
relief from this court via a petition for review on certiorari under Rule45 of the Rules of Court. As such, we are well
in a position to dismiss the present petition outright. Nevertheless, as the actions of the Cebu City Regional Trial
Court, Branch 10 are tainted with grave abuse of discretion amounting to lack or excess of jurisdiction, this court
treats the present Rule 45 petition as a Rule 65 petition and gives it due course.

A petition for review on certiorari under Rule 45 is a mode of appeal. This is eminently clear from the very title
and from the first section of Rule 45 (as amended by A.M. No. 07-7-12-SC):

Rule 45
APPEAL BY CERTIORARITO THE SUPREME COURT

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorarifrom a judgment, final
order or resolution of the Court of Appeals, the Sandiganbayan, the Court of Tax Appeals, the Regional Trial
Court or other courts, whenever authorized by law, may file with the Supreme Court a verified petition for review
on certiorari. The petition may include an application for a writ of preliminary injunction or other provisional
remedies and shall raise only questions of law, which must be distinctly set forth. The petitioner may seek the
same provisional remedies by verified motion filed inthe same action or proceeding at any time during its
pendency. (Emphasis supplied)

Further, it is elementary that anappeal may only be taken from a judgment or final order that completely disposes
of the case.67 As such, no appeal may be taken from an interlocutory order 68 (i.e., "one which refers to something
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between the commencement and end of the suit which decides some point or matter but it is not the final
decision of the whole controversy"69). As explained in Sime Darby Employees Association v. NLRC, 70 "[a]n
interlocutory order is not appealable until after the rendition of the judgment on the merits for a contrary rule
would delay the administration of justice and unduly burden the courts." 71

An order denying a motion to dismiss is interlocutory in character. Hence, it may not be the subject of an appeal.
The interlocutory nature of an order denying a motion to dismiss and the remedies for assailing such an order
were discussed in Douglas Lu Ym v. Nabua:72

An order denying a motion to dismiss is an interlocutory order which neither terminates nor finally disposes of a
case, as it leaves something to be done by the court before the case is finally decided on the merits. As such, the
general rule is that the denial of a motion to dismiss cannot be questioned in a special civil action for
certiorariwhich is a remedy designed to correct errors ofjurisdiction and not errors of judgment. Neither can a
denial of a motion todismiss be the subject of an appeal unless and until a final judgment or order is rendered.In
order to justify the grant of the extraordinary remedy of certiorari, the denial of the motion to dismiss must have
been tainted with grave abuse of discretion amounting to lack or excess of jurisdiction. 73 (Emphasis supplied)

Thus, where a motion to dismiss is denied, the proper recourse is for the movant to file an answer. 74 Nevertheless,
where the order denying the motion to dismiss is tainted with grave abuse of discretion amounting to lack or
excess of jurisdiction, the movant may assail such order via a Rule 65 (i.e., certiorari, prohibition, and/or
mandamus) petition. This is expressly recognized in the third paragraph of Rule 41, Section 1 of the Rules of
Court.75 Following the enumeration in the second paragraph of Rule 41, Section 1 of the instances when an appeal
may not be taken, the third paragraph specifies that "[in] any of the foregoing circumstances, the aggrieved party
may file an appropriate special civil action as provided in Rule 65." 76

Per these rules, AEV is in error for having filed what it itself calls a "Petition for Review on Certiorari [Appeal by
Certiorari under Rule 45 of the Rules of Court]." 77 Since AEV availed of the improper remedy, this court is well in a
position to dismiss the present petition.

Nevertheless, there have been instances when a petition for review on certiorari under Rule 45 was treated by this
court as a petition for certiorari under Rule 65. As explained in China Banking Corporation v. Asian Construction
and Development Corporation:78

[I]n many instances, the Court has treated a petition for review on certiorariunder Rule 45 as a petition for
certiorari under Rule 65 of the Rules of Court, such as in cases where the subject of the recourse was one of
jurisdiction, or the act complained of was perpetrated by a court with grave abuse of discretion amounting to lack
or excess of jurisdiction.79

In this case, the May 5, 2011 and June 24, 2011 orders of the Cebu City Regional Trial Court, Branch 10 in Civil Case
No. CEB-37004 are assailed for having denied AEV’s motion todismiss despite: first, the second complaint having
been filed in a manner constituting forum shopping; second, the prior judgment on the merits made in Civil Case
No. CEB-34951, thereby violating the principle ofres judicata; and third, the (then) pendency of Civil Case No.
CEB-34951 with respect to the parties that, unlike AEV, were not discharged from the case, thereby violating the
principle of litis pendentia. The same orders are assailed for having allowed CAGLI’s application for arbitration to
continue despite supposedly clear and unmistakable evidence that AEV is not bound by an agreement to
arbitrate with CAGLI.

As such, the Cebu City, Regional Trial Court, Branch 10’s orders are assailed for having been made with grave
abuse of discretion amounting to lack or excess of jurisdiction in that the Cebu City Regional Trial Court, Branch
10 chose to continue taking cognizance of the second complaint, despite there being compelling reasons for its
dismissal and the Cebu City, Regional Trial Court Branch 20’s desistance. Conformably, we treat the present
petition as a petition for certiorari under Rule 65 of the Rules of Court and give it due course.

The complaint in Civil Case

No. CEB-37004 constitutes
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forum shopping and is barred
by res judicata

The concept of and rationale against forum shopping were explained by this court in Top Rate Construction &
General Services, Inc. v. Paxton Development Corporation: 80

FORUM SHOPPING is committed by a party who institutes two or more suits in different courts, either
simultaneously or successively, in order to ask the courts to rule on the same or related causes or to grant the
same or substantially the same reliefs, on the supposition that one or the other court would make a
favorabledisposition or increase a party's chances of obtaining a favorable decision or action. It is an act of
malpractice for it trifles with the courts, abuses their processes, degrades the administration of justice and adds to
the already congested court dockets. What is critical is the vexation brought upon the courts and the litigants by
a party who asks different courts to rule on the same or related causes and grant the same or substantially the
same reliefs and in the process creates the possibility of conflicting decisions being rendered by the different fora
upon the same issues, regardless of whether the court in which one of the suits was brought has no jurisdiction
over the action.81

Equally settled is the test for determining forum shopping. As this court explained in Yap v. Chua:82

To determine whether a party violated the rule against forum shopping, the most important factor toask is
whether the elements of litis pendentiaare present, or whether a final judgment in one case will amount to res
judicatain another; otherwise stated, the test for determining forum shopping is whether in the two (or more)
cases pending, there is identity of parties, rights or causes of action, and reliefs sought.83

Litis pendentia "refers to that situation wherein another action is pending between the same parties for the same
cause ofaction, such that the second action becomes unnecessary and vexatious." 84 It requires the concurrence of
three (3) requisites: "(1)the identity of parties, or at least such as representing the same interests in both actions;
(2) the identity of rights asserted and relief prayed for,the relief being founded on the same facts; and (3) the
identity of the two cases such that judgment in one, regardless of which party issuccessful, would amount tores
judicatain the other."85

In turn, prior judgment or res judicata bars a subsequent case when the following requisites concur: "(1) the
former judgment is final; (2) it is rendered by a court having jurisdiction over the subject matter and the parties;
(3) it is a judgment or an order on the merits; (4) there is — between the first and the second actions — identityof
parties, of subject matter, and of causes of action."86

Applying the cited concepts and requisites, we find that the complaint in Civil Case No. CEB-37004 is barred byres
judicata and constitutes forum shopping.

First, between the first and second complaints, there is identity of parties. The first complaint was brought by
CAGLI as the sole plaintiff against Victor S. Chiongbian, ATSC, and AEV as defendants. In the second complaint,
CAGLI was joined by Benjamin D. Gothong as (co-)plaintiff. As to the defendants, ATSC was deleted while
Chiongbian and AEV were retained.

While it is true that the parties to the first and second complaints are not absolutely identical, this court has
clarified that, for purposes of forum shopping, "[a]bsolute identity of parties is not required [and that it] is enough
that there is substantial identity of parties." 87

Even as the second complaint alleges that Benjamin D. Gothong "is . . . suing in his personal capacity," 88 Gothong
failed to show any personal interest in the reliefs sought by the second complaint. Ultimately, what is at stake in
the second complaint is the extent to which CAGLI may compel AEV and Chiongbian to arbitrate in order that
CAGLI may then recover the value of its alleged unreturned inventories. This claim for recovery is pursuant to the
agreement evinced in Annex SL-V. Annex SL-V was entered into by CAGLI and not by Benjamin D. Gothong.
While it is true that Benjamin D. Gothong, along with Bob D. Gothong, signed Annex SL-V, he did so only in a
representative, and not in a personal, capacity. As such, Benjamin D. Gothong cannot claim any right that
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personally accrues to him on account of Annex SL-V. From this, it follows that Benjamin D. Gothong is not a real
party in interest — "one who stands to be benefitted or injured by the judgment in the suit or the party entitled
to the avails of the suit"89 — and that his inclusion in the second complaint is an unnecessary superfluity.

Second, there is identity in subject matter and cause of action. There is identity in subject matter as both
complaints are applications for the same relief. There is identity in cause ofaction as both complaints are
grounded on the right to be paid for or to receive the value of excess inventories (and the supposed
corresponding breach thereof) as spelled out in Annex SL-V.

The first and second complaints are both applications for arbitration and are founded on the same instrument —
Annex SL-V. Moreover, the intended arbitrations in both complaintscater to the sameultimate purpose, i.e., that
CAGLI may recover the value of its supposedly unreturned inventories earlier delivered to WLI/WG&A/ATSC.

In both complaints, the supposedpropriety of compelling the defendants to submit themselves to arbitration are
anchored on the same bases: (1) Section 6.8 of the SPA, which provides that the January 8, 1996 Agreement shall
be deemed terminatedbut that the rights and obligations arising from Annex SL-V shall continue to subsist;90 (2)
Section 6.5 of the SPA, which requires arbitration as the mode for settling disputes relating to the SPA; 91 and, (3)
defendants’ refusal to submit themselves to arbitration vis-a-vis Republic Act No. 876, which provides that "[a]
party aggrieved by the failure, neglect or refusal of another to perform under an agreement in writing providing
for arbitration may petition the court for an order directing that such arbitration proceed in the manner provided
for in such agreement."92

Both complaints also rely on the same factual averments: 93

1. that ASC, CAGLI, and WLI entered into an agreement on January 8, 1996;

2. that under Annex SL-V of the Agreement, WLI/WG&A "committed to acquire certain [inventories], the
total aggregate value of which shall not exceed ₱400 Million";94

3. that after examination, it was ascertained that the value of the transferred inventories exceeded ₱400
million;

4. that pursuant to Annex SL-V, WG&A paid CAGLI ₱400 million but that the former failed to return or
pay for spare parts representing a value in excess of ₱400 million;

5. "[t]hat on August 31, 2001, [CAGLI] wrote the WG&A through its AVP Materials Management, Ms.
Concepcion M. Magat, asking for the return of the excess spare parts"; 95

6. that on September 5, 2001, WG&A’s Ms. Magat replied that the matter is beyond her authority level
and that she must elevate it to higher management;

7. that several communications demanding the return of the excess spare parts were sent to WG&Abut
these did not elicit any response; and

8. "[t]hat the issue of excess spare parts, was taken over by events, when on July 31, 2002," 96 the
Chiongbians and Gothongs entered into an Escrow Agreement with AEV.

Third, the order dated December 4, 2009 of the Cebu City Regional Trial Court, Branch 20, which dismissed the
first complaint with respect to AEV, attained finality when CAGLI did not file a motion for reconsideration,
appealed, or, in any other manner, questioned the order.

Fourth, the parties did not dispute that the December 4, 2009 order was issued by a court having jurisdiction over
the subject matter and the parties. Specifically as to jurisdiction over the parties,jurisdiction was acquired over
CAGLI as plaintiff when it filed the first complaint and sought relief from the Cebu City Regional Trial Court,
Branch 20; jurisdiction over defendants AEV, ATSC, and Victor S.Chiongbian was acquired with the service of
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summons upon them. Fifth, the dismissal of the first complaint with respect to AEV was a judgment on the merits.
As explained in Cabreza, Jr. v. Cabreza:97

A judgment may be considered as one rendered on the merits "when it determines the rights and liabilities of the
parties based on the disclosed facts, irrespective of formal, technical or dilatoryobjections"; or when the judgment
is rendered "aftera determination of which party is right, as distinguished from a judgment rendered upon some
preliminary or formal or merely technical point." 98

Further, as this court clarified in Mendiola v. Court of Appeals, 99 "[i]t is not necessary . . . that there [be] a
trial"100 in order that a judgment be considered as one on the merits.

Prior to issuing the December 4, 2009 order dismissing the first complaint with respect to AEV, the Cebu City
Regional Trial Court, Branch 20 allowed the parties the full opportunity to establish the facts and to ventilate their
arguments relevant to the complaint. Specifically, the Cebu City Regional Trial Court, Branch 20 admitted: 1) AEV’s
motion to dismiss;101 2) CAGLI’s opposition to the motion to dismiss; 102 3) AEV’s reply and opposition;103 4) CAGLI’s
rejoinder;104 and 5) AEV’s surrejoinder.105

Following these, the Cebu City Regional Trial Court, Branch 20 arrived at the following findings and made a
definitive determination that CAGLI had no right to compel AEV to subject itself to arbitration with respect to
CAGLI’s claims under Annex SL-V:

After going over carefully the contentions and arguments of both parties, the court has found that no contract or
document exists binding CAGLI and AEV to arbitrate the former’s claim. The WLI Letter upon which the claim is
based confirms only the commitment of William Lines, Inc. (WLI) to purchase certain material inventories from
CAGLI. It does not involve AEV. The court has searched in vain for any agreement or document showing that said
commitment was passed on to and assumed by AEV. Such agreement or document, if one exists, being an
actionable document, should have been attached to the complaint. While the Agreement of January 8, 1996 and
the Share Purchase Agreement provide for arbitration of disputes, they refer to disputes arising from or in
connection with the Agreements themselves. No reference is made, as included therein, to the aforesaid
commitment of WLI or to any claim that CAGLI may pursue based thereon or relative thereto. Section 6.8 of the
Share Purchase Agreement, cited by plaintiff CAGLI, does not incorporate therein, expressly or impliedly, the WLI
commitment above-mentioned. It only declares that the rights and obligations of the parties under the WLI Letter
shall survive even after the termination of the Shareholder’s Agreement. It does not speak of arbitration. Finally,
the complaint does not allege the existence of a contract obliging CAGLI and AEV to arbitrate CAGLI’s claim
under the WLI Letter. Consequently, there is no legal or factual basis for the present complaint for application for
arbitration.106 (Emphasis supplied)

In the assailed order dated May 5, 2011, the Cebu City Regional Trial Court, Branch 10 made much of the Cebu
City Regional Trial Court, Branch 20’s pronouncement in the latter’s December 4, 2009 order that "the [first]
complaint fails to state a cause of action." 107 Based on this, the Cebu City Regional Trial Court, Branch 10
concluded that the dismissal of the first complaint was one made without prejudice, thereby "leav[ing] the parties
free to litigate the matter ina subsequent action, as though the dismissal [sic] action had not been
commenced."108

The Cebu City Regional Trial Court, Branch 10 is in serious error. In holding that the second complaint was not
barred by res judicata, the Cebu City Regional Trial Court, Branch 10 ignored established jurisprudence.

Referring to the earlier cases of Manalo v. Court of Appeals109 and Mendiola v. Court of Appeals,110 this court
emphasized in Luzon Development Bank v. Conquilla 111 that dismissal for failure to state a cause of action may
very well be considered a judgment on the merits and, thereby, operate as res judicata on a subsequent case:

[E]ven a dismissal on the ground of "failure to state a cause of action" may operate as res judicata on a
subsequent case involving the same parties, subject matter, and causes of action, provided that the order of
dismissalactually ruled on the issues raised.What appears to be essential to a judgment on the merits is that it be
a reasoned decision, which clearly states the facts and the law on which it is based. 112 (Emphasis supplied)
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To reiterate, the Cebu City Regional Trial Court, Branch 20 made a definitive determination that CAGLI had no
right to compel AEV to subject itself to arbitrationvis-a-vis CAGLI’s claims under Annex SL-V. This determination
was arrived at after due consideration of the facts established and the arguments advancedby the parties.
Accordingly, the Cebu City Regional Trial Court, Branch 20’s December 4, 2009 order constituted a judgment on
the merits and operated as res judicata on the second complaint.

In sum, the requisites for res judicata have been satisfied and the second complaint should, thus, have been
dismissed. From this, it follows that CAGLI committed an act of forum shopping in filing the second complaint.
CAGLI instituted two suits in two regional trial court branches, albeit successively and not simultaneously. It asked
both branches to rule on the exact same cause and to grant the exact same relief. CAGLI did so after it had
obtained an unfavorable decision (at least with respect to AEV) from the Cebu City Regional Trial Court, Branch
20. These circumstances afford the reasonable inference that the second complaint was filed in the hopes of a
more favorable ruling.

Notwithstanding our pronouncements sustaining AEV’s allegations that CAGLI engaged in forum shopping and
that the second complaint was barred by res judicata, we find that at the time of the filing of the second
complaint, AEV had already been discharged from the proceedings relating to the first complaint. Thus,
asbetween AEV and CAGLI, the first complaint was no longer pending at the time of the filing of the second
complaint. Accordingly, the second complaint could not have been barred by litis pendentia.

There is no agreement
binding AEV to arbitrate
with CAGLI on the latter’s
claims arising from Annex SL-V

For arbitration to be proper, it is imperative thatit be grounded on an agreement between the parties. This was
adequately explained in Ormoc Sugarcane Planters’ Association,Inc. v. Court of Appeals: 113

Section 2 of R.A. No. 876 (the Arbitration Law) pertinently provides:

Sec. 2. Persons and matterssubject to arbitration. – Two or more persons or parties may submit to the arbitration
of one or more arbitrators any controversy existing between them at the time of the submission and which may
be the subject of an action, or the parties to any contract may in such contract agree to settle by arbitration a
controversy thereafter arising between them. Such submission or contract shall be valid, enforceable and
irrevocable, save upon such grounds as exist at law for the revocation of any contract. . . . (Emphasis ours)

The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit to arbitration
somefuture dispute, usually stipulated upon in a civil contract between the parties, and known as an agreement
to submit to arbitration, and (b) an agreement submitting an existing matter of difference to arbitrators, termed
the submission agreement. Article XX of the milling contract is an agreement to submit to arbitrationbecause it
was made in anticipation of a dispute that might arise between the parties after the contract’s execution.

Except where a compulsory arbitration is provided by statute, the first step toward the settlement of a difference
by arbitration is the entry by the parties into a valid agreement to arbitrate.An agreement to arbitrate is a
contract, the relation ofthe parties is contractual, and the rights and liabilities of the parties are controlled by the
law of contracts. In an agreement for arbitration, the ordinary elements of a valid contract must appear, including
an agreement toarbitrate some specific thing, and an agreement to abide by the award, either in express
language or by implication.114 (Emphasis supplied)

In this petition, not one of the parties — AEV, CAGLI, Victor S. Chiongbian, and Benjamin D. Gothong — has
alleged and/or shown that the controversy is properly the subject of "compulsory arbitration [as] provided by
statute."115 Thus, the propriety of compelling AEV to submit itself to arbitration must necessarilybe founded on
contract.

Four (4) distinct contracts have been cited in the present petition:
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 1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI merged their shipping enterprises, with
WLI (subsequently renamed WG&A) as the surviving entity. Section 11.06 of this Agreement provided for
arbitration as the mechanism for settling all disputes arising out of or in connection with the Agreement.

2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded ASC and any other Aboitiz-
controlled entity), and which confirmed WLI’s commitment to acquire certain inventories, worth not more
than 400 million, of CAGLI. Annex SL-V stated that the acquisition was "pursuant to the Agreement." 116 It
did not contain an arbitration clause.

3. The September 23, 2003 Share Purchase Agreement or SPA in which AEV agreed to purchasethe
Chiongbian and Gothong groups' shares in WG&A’s issued and outstanding stock. Section 6.5 of the SPA
provided for arbitration as the mode of settling any dispute arising from the SPA. Section 6.8 of the SPA
further provided that the Agreement of January 8, 1996 shall be deemed terminatedexcept its Annex SL-
V.

4. The Escrow Agreement whereby ING Bank N.V.-Manila Branch was to take custody of the shares
subject of the SPA. Section 14.7 of the Escrow Agreement provided that all disputes arising from it shall
be settled via arbitration.

The obligation for WLI to acquire certain inventories of CAGLI and which is the subject of the present petition was
contained in Annex SL-V. It is therefore this agreement which deserves foremost consideration. As to this
particular agreement, these points must be underscored: first, that it has no arbitration clause; second, Annex SL-
V is only between WLI and CAGLI.

On the first point, it is clear, pursuant to this court’s pronouncements in Ormoc Sugarcane Planters’ Association,
that neither WLI nor CAGLI can compel arbitration under Annex SL-V. Plainly, there is no agreement to arbitrate.

It is of no moment that Annex SL-Vstates that it was made "pursuant to the Agreement" or that Section 11.06 of
the January 8, 1996 Agreement provides for arbitration as the mode of settling disputes arising out of or in
connection with the Agreement.

For one, to say that Annex SL-V was made"pursuant to the Agreement" is merely to acknowledge: (1) the factual
context in which Annex SL-V was executed and (2) that it was that context that facilitated the agreement
embodied in it. Absentany other clear or unequivocal pronouncement integrating Annex SL-V into the January 8,
1996 Agreement, it would be too much of a conjecture to jump to the conclusion that Annex SL-V is governed by
the exact same stipulations which govern the January 8, 1996 Agreement.

Likewise, a reading of the Agreement’s arbitration clause will reveal that it does not contemplate disputes arising
from Annex SL-V.

Section 11.06 of the January 8, 1996 Agreement requires the formation of an arbitration tribunal composed of four
(4) arbitrators. Each of the parties — WLI, CAGLI, and ASC — shall appoint one (1) arbitrator, and the fourth
arbitrator, who shall actas chairman, shall be appointed by the three (3) arbitrators appointed by the parties. From
the manner by which the arbitration tribunal is to be constituted, the necessary implication is that the arbitration
clause is applicable tothree-party disputes — as will arise from the tripartite January 8, 1996 Agreement — and
not to two-party disputesas will arise from the two-party Annex SL-V.

From the second point — that Annex SL-V is only between WLI and CAGLI — it necessarily follows that none but
WLI/WG&A/ATSC and CAGLI are bound by the terms of Annex SL-V. It is elementary that contracts are
characterized by relativity or privity, that is, that "[c]ontracts take effect only between the parties, their assigns and
heirs."117 As such, one who is not a party to a contract may not seek relief for such contract’s breach. Likewise, one
who is not a party to a contract may not be held liable for breach of any its terms.

While the principle of privity or relativity of contracts acknowledges that contractual obligations are transmissible
to a party’s assigns and heirs, AEV is not WLI’s successor-in-interest. In the period relevant to this petition, the
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transferee of the inventories transferred by CAGLI pursuant to Annex SL-V assumed three (3) names: (1) WLI, the
original name of the entity that survived the merger under the January 8, 1996 Agreement; (2) WG&A, the name
taken by WLI in the wake of the Agreement; and (3) ATSC, the name taken by WLI/WG&A inthe wake of the SPA.
As such, it is now ATSC that is liable under Annex SL-V.

Pursuant to the January 8, 1996 Agreement, the Aboitiz group (via ASC) and the Gothong group (viaCAGLI)
became stockholders of WLI/WG&A, along with the Chiongbiangroup (which initially controlled WLI). This
continued until, pursuant to the SPA, the Gothong group and the Chiongbian group transferred their shares to
AEV. With the SPA, AEV became a stockholder of WLI/WG&A, which was subsequently renamed ATSC.
Nonetheless, AEV’s status asATSC’s stockholder does not subject it to ATSC’s obligations

It is basic that a corporation has a personality separate and distinct from that of its individual stockholders. Thus,
a stockholder does not automatically assume the liabilities of the corporation of which he is a stockholder. As
explained in Philippine National Bankv. Hydro Resources Contractors Corporation: 118

A corporation is an artificial entitycreated by operation of law. It possesses the right of succession and such
powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality
separate and distinct from that of its stockholders and from that of other corporations to which it may be
connected. As a consequence of its status as a distinct legal entityand as a result of a conscious policy decision to
promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its
obligations. In other words, by virtue of the separate juridical personality ofa corporation, the corporate debt or
credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of
limited liability.119

In fact, even the ownership by a single stockholder of all or nearly all the capital stock of a corporation is not, in
and of itself, a ground for disregarding a corporation’s separate personality. As explained in Secosa v. Heirs of
Francisco:120

It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from
thatof its stockholders or members. It has a personality separate and distinct from those of the persons
composing it as well as from that of any other entity to which it may be related. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself
sufficient ground for disregarding the separate corporate personality.A corporation’s authority to act and its
liability for its actions are separate and apart from the individuals who own it.

The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers
and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such cases asfraud that may work inequities
among members of the corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. 121 (Emphasis
supplied)

AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make AEV liable for ATSC’s obligations.
Moreover, the SPA does not contain any stipulation which makes AEV assume ATSC’s obligations. It is true that
Section 6.8 of the SPA stipulates that the rights and obligations arising from Annex SL-V are not terminated. But
all that Section 6.8 does is recognize that the obligations under Annex SL-V subsist despite the termination of the
January 8, 1996 Agreement. At no point does the text of Section 6.8 support the position that AEV steps into the
shoes of the obligor under Annex SL-V and assumes its obligations.

Neither does Section 6.5 of the SPAsuffice to compel AEV to submit itself to arbitration. While it is true that
Section 6.5 mandates arbitration as the mode for settling disputes between the parties to the SPA, Section 6.5
does not indiscriminatelycover any and all disputes which may arise between the parties to the SPA. Rather,
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Section 6.5 is limited to "dispute[s] arising between the parties relating tothis Agreement [i.e., the SPA]." 122 To
belabor the point, the obligation which is subject of the present dispute pertains to Annex SL-V, not to the SPA.
That the SPA, in Section 6.8, recognizes the subsistence of Annex SL-Vis merely a factual recognition. It does not
create new obligations and does not alter or modify the obligations spelled out in Annex SL-V.

AEV was drawn into the present controversy on account of its having entered into the SPA. This SPA made AEV a
stockholder of WLI/WG&A/ATSC. Even then, AEV retained a personality separate and distinct from
WLI/WG&A/ATSC. The SPA did not render AEV personally liable for the obligations of the corporation whose
stocks it held.

The obligation animating CAGLI’s desire to arbitrate is rooted in Annex SL-V. Annex SL-V is a contractentirely
different from the SPA. It created distinct obligations for distinctparties. AEV was never a party to Annex SL-V.
Rather than pertaining to AEV, Annex SL-V pertained to a different entity: WLI (renamed WG&A then renamed
ATSC). AEV is, thus, not bound by Annex SL-V.

On one hand, Annex SL-V does not stipulate that disputes arising from it are to be settled via arbitration.On the
other hand, the SPA requires arbitration as the mode for settling disputes relating to it and recognizes the
subsistence of the obligations under Annex SL-V. But as a separate contract, the mere mention of Annex SL-V in
the SPA does not suffice to place Annex SL-V under the ambit of the SPA or to render it subject to the SPA’s
terms, such as the requirement to arbitrate.

WHEREFORE, the petition is GRANTED. The assailed orders dated May 5, 2011 and June 24,2011 of the Regional
Trial Court, Cebu City, Branch 10 in Civil Case No. CEB-37004 are declared VOID. The Regional Trial Court, Cebu
City, Branch 10 is ordered to DISMISSCivil Case No. CEB-37004.

SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

G.R. No. 171626 August 6, 2014

OLONGAPO CITY, Petitioner,

vs.
SUBIC WATER AND SEWERAGE CO., INC., Respondent.

DECISION

BRION, J.:

We resolve in this petition for certiorari1 under Rule 65 the challenge to the July 6, 2005 decision 2 and the January
3, 2006 resolution3 (assailed CA rulings) of the Court of Appeals (CA) in CAG.R. SP No. 80947.

These assailed CA rulings annulled and set aside: a) the July 29, 2003 order 4 of the Regional Trial Court of
Olongapo, Br. 75 (RTC Olongapo ), which directed the issuance of a writ of execution in Civil Case No. 582-0-90,
against respondent Subic Water and Sewerage Co., Inc. (Subic Water); b) the July 31, 2003 writ of
execution5subsequently issued by the same court; and c) the October 7, 2003 order 6 of R TC Olongapo, denying
Subic Water's special appearance with motion to reconsider order dated July 29, 2003 and to quash writ of
execution dated July 31, 2003.7

Factual Antecedents

On May 25, 1973, Presidential Decree No. 198 8 (PD 198) took effect. This law authorized the creation of local water
districts which may acquire, install, maintain and operate water supply and distribution systems for domestic,
industrial, municipal and agricultural uses.9
Page 150 of 343
Pursuant to PD 198, petitioner Olongapo City (petitioner) passed Resolution No. 161, which transferred all
itsexisting water facilities and assets under the Olongapo City Public Utilities Department Waterworks Division, to
the jurisdiction and ownership of the Olongapo City Water District (OCWD). 10

PD 198, as amended,11 allows local water districts (LWDs)which have acquired an existing water system of a
localgovernment unit (LGU) to enter into a contract to pay the concerned LGU. In lieu of the LGU’s share in the
acquired water utility plant, it shall be paid by the LWD an amount not exceeding three percent (3%) of the LWD’s
gross receipts from water sales in any year.12

On October 24, 1990, petitioner filed a complaint for sum of money and damages against OCWD. Among others,
petitioner alleged that OCWD failed to pay its electricity bills to petitioner and remit its payment under the
contract to pay, pursuant to OCWD’s acquisition of petitioner’s water system. In its complaint, petitioner prayed
for the following reliefs:

"WHEREOF, it is respectfully prayed of this Honorable Court that after due hearing and notice, judgment be
rendered in favor of plaintiff ordering the defendant to:

(a) pay the amount of ₱26,798,223.70 plus legal interests from the filing of the Complaint to actual full
payment;

(b) pay the amount of its in lieu share representing three percent of the defendant’s gross receipts from
water sales starting 1981 up to present;

(c) pay the amount of ₱1,000,000 as moral damages; and

(d) pay the cost of suit and other litigation expenses." 13

In its answer,14 OCWD posed a counterclaim against petitioner for unpaid water bills amounting to
₱3,080,357.00.15

In the interim, OCWD entered into a Joint Venture Agreement 16 (JVA) with Subic Bay Metropolitan Authority
(SBMA), Biwater International Limited (Biwater), and D.M. Consunji, Inc. (DMCI) on November 24, 1996. Pursuant
to this agreement, Subic Water– a new corporate entity – was incorporated, withthe following equity participation
from its shareholders:

SBMA 19.99% or 20%

OCWD 9.99% or 10%

Biwater 29.99% or 30%

DMCI 39.99% or 40%17

On November 24, 1996, Subic Water was granted the franchise to operate and to carry on the businessof
providing water and sewerage services in the Subic BayFree Port Zone, as well as in Olongapo City. 18 Hence, Subic
Water took over OCWD’s water operations in Olongapo City. 19

To finally settle their money claims against each other, petitioner and OCWD entered into a compromise
agreement20 on June 4, 1997. In this agreement, petitioner and OCWD offset their respective claims and
counterclaims. OCWD also undertook to pay to petitioner its net obligation amounting to ₱135,909,467.09, to be
amortized for a period of not exceeding twenty-five (25) years at twenty-fourpercent (24%) per annum.21

The compromise agreement also contained a provision regarding the parties’ requestthat Subic Water,
Philippines,which took over the operations of the defendant Olongapo City Water District be made the co-

Page 151 of 343

makerfor OCWD’s obligations. Mr. Noli Aldip, then chairman of Subic Water, acted as its representative and
signed the agreement on behalf of Subic Water.

Subsequently, the parties submitted the compromise agreement to RTC Olongapo for approval. In its decision
dated June 13, 1997,22 the trial court approved the compromiseagreement and adopted it as its judgment in Civil
Case No. 580-0-90.

Pursuant to the compromise agreement and in payment of OCWD’s obligations to petitioner,petitioner and
OCWD executed a Deed of Assignment onNovember 24, 1997. 23 OCWD assigned all of its rights in the JVA in
favor of the petitioner, including but not limited to the assignment of its shares, lease payments, regulatory
assistance fees and other receivables arising out of or related to the Joint Venture Agreement and the Lease
Agreement.24 On December 15,1998, OCWD was judicially dissolved. 25

On May 7, 1999, to enforce the compromise agreement, the petitioner filed a motion for the issuance of a writ of
execution26 with the trial court. In its July 23, 1999 order,27 the trial court granted the motion, but did not issue the
corresponding writ of execution.

Almost four years later, on May 30, 2003, the petitioner, through its new counsel, filed a notice of appearance
with urgent motion/manifestation28 and prayed again for the issuance of a writ of execution against OCWD. A
certain Atty. Segundo Mangohig, claiming to be OCWD’s former counsel, filed a manifestation alleging that
OCWD had already been dissolved and that Subic Water is now the former OCWD. 29

Because of this assertion, Subic Water also filed a manifestation informing the trial court that as borne out by the
articles of incorporation and general information sheet of Subic Water x x x defendant OCWD is not Subic
Water.30The manifestation also indicated that OCWD was only a ten percent (10%) shareholder of Subic Water;
and that its 10% share was already inthe process of being transferred to petitioner pursuant to the Deed of
Assignment dated November 24, 1997.31

The trial court granted the motion for execution and directed its issuance against OCWD and/or Subic Water.
Because of this unfavorable order, Subic Water filed a special appearance with motion to: (1) reconsider order
dated July29, 2003; and (2) quash writ of execution dated July 31, 2003. 32

The trial court denied Subic Water’s special appearance, motion for reconsideration, and its motion to quash.
Subic Water then filed a petition for certiorari 33 with the CA, imputing grave abuse of discretion amounting to
lack or excess of jurisdiction to RTC Olongapo for issuing its July 29, 2003 and October 7, 2003 orders aswell as
the writ of execution dated July 31, 2003. The CA’s Ruling

In its decision dated July 6, 2005,34 the CA granted Subic Water’s petition for certiorariand reversed the trial
court’s rulings.

The CA found that the writ ofexecution dated July 31, 2003 35 did not comply with Section 6, Rule 39 of the Rules
of Court, to wit:

Section 6. Execution by motion orby independent action. — A final and executory judgment or order may be
executed on motion within five (5) years from the date of its entry. After the lapse of such time, and before it is
barred by the statute of limitations, a judgment may be enforced by action. The revived judgment may also be
enforced by motion within five (5) years from the date of its entry and thereafter by action before it is barred by
the statute of limitations. (6a)[emphasis ours]

A judgment on a compromiseagreement is immediately executory and is considered to have been entered on the
date it was approved by the trial court. 36 Since the compromise agreement was approved and adoptedby the trial
court on June 13, 1997, this should be the reckoning date for the counting of the period for the filing of a valid
motion for issuance of a writ of execution. Petitioner thus had until June 13, 2002, to file its motion.

Page 152 of 343

The CA further remarked that whileit was true that a motion for execution was filed by petitioner on May 7, 1999,
and the same was granted by the trial court in its July 23, 1999 order, 37 no writ of execution was actually issued.

As the CA looked at the case, petitioner, instead of following up with the trial court the issuance ofthe writ of
execution, did not do anything to secure its prompt issuance. It waitedanother four years to file a second motion
for execution on May 30, 2003.38 By this time, the allowed period for the filing of a motion for the issuance of the
writ had already lapsed. Hence, the trial court’s July 29, 2003 order granting the issuance of the writ was null and
void for having been issued by a court without jurisdiction.

The CA denied petitioner’s subsequentmotion for reconsideration. Petitioner is now before us on a petition for
certiorari under Rule 65.

The Petition

The petitioner acknowledged the rule that the execution of a judgment could no longer be made by mere motion
after the prescribed five-year period had already lapsed. However, it argued that the delay for the issuance of the
writ of execution was caused by OCWD and Subic Water. The petitioner submitted that this Court had allowed
execution by mere motion even after the lapse ofthe five-year period, when the delay was caused or occasioned
by the actions of the judgment debtor.39

Also, the petitioner asserted that although Subic Water was not a party in the case, it could still be subjected to a
writ of execution, since it was identified as OCWD’s co-maker and successor-in-interest in the compromise
agreement.40

Lastly, the petitioner contended that the compromise agreement was signed by Mr. Noli R. Aldip,then Subic
Water’s chairman, signifying Subic Water’s consent to the agreement.

The Court’s Ruling

We DISMISSthe petition for being the wrong remedy and, in any case, for lack of merit; what we have before us is
a final judgment that we can no longer touch unless there is grave abuse of discretion.

A. Procedural Law Aspect

Certiorari is not a substitute for a lost appeal.

At the outset, we emphasize thatthe present petition, brought under Rule 65, merits outright dismissal for having
availed an improper remedy.

The instant petition should havebeen brought under Rule 45 in a petition for review on certiorari. Section 1 of this
Rule mandates:

Section 1. Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or
final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be distinctly set forth. (1a, 2a) [emphasis supplied]

Supplementing Rule 45 are Sections 341 and 442 of Rule 56 which govern the applicable procedure in the
Supreme Court.

Appeals from judgmentsor final orders or resolutions of the CA should be made through a verified petition for
review on certiorari under Rule 45.43 In this case, petitioner questioned the July 6, 2005 decision 44 and the January
3, 2006 resolution45 of the CA which declared as null and void the writ of execution issued by the trial court. Since
the CA’s pronouncement completely disposed of the case and the issues raised by the parties, it was the proper

Page 153 of 343

subject of a Rule 45 petition. It was already a final order that resolved the subject matter in its entirety, leaving
nothing else to be done.

A petition for certiorari under Rule 65 is appropriate only if there is no appeal, or any plain, speedy, and adequate
remedy in the ordinary course of law available tothe aggrieved party. As we have distinctly explained in the case
of Pasiona v. Court of Appeals:46

The aggrieved party is proscribed from assailing a decision or final order of the CA viaRule 65 because such
recourse is proper only if the party has no plain,speedy and adequate remedy in the course of law. In this case,
petitioner had an adequate remedy, namely, a petition for review on certiorari under Rule 45 ofthe Rules of
Court.A petition for review on certiorari, not a special civil action for certiorari was, therefore, the correct remedy.

xxxx

Settled is the rule that where appeal is available to the aggrieved party, the special civil actionfor certiorari will not
be entertained – remedies of appealand certiorari are mutually exclusive, not alternative or successive. Hence,
certiorari is not and cannot be a substitute for a lost appeal,especially if one's own negligence or error in one's
choice of remedy occasioned such loss or lapse. 47 [emphasis ours]

The petitioner received the CA’s assailed resolution denying its motion for reconsideration on January 9, 2006.
Following Rule 45, Section 2 of the Rules of Court, 48 the petitioner had until January 24, 2006 to file its petition for
review. It could have even filed a motion for a 30-day extension of time, a motion that this Court grants for
justifiable reasons.49 But all of these, it failed to do. Thus, the assailed CA rulings became final and executory and
could no longer be the subject of an appeal.

Apparently, to revive its lost appeal, petitioner filed the present petition for certiorari that – under Rule 65 – may
be filed within sixty days from the promulgation of the assailed CA resolution (on January 3, 2006). A Rule 65
petition for certiorari, however, cannot be a substitute for a lost appeal. With the lapse of the prescribed period
for appeal without an action from the petitioner, the present petition for certiorari– a mere replacement –must be
dismissed.

But even without the procedural infirmity, the present recourse to us has no basis on the merits and must be
denied.

Execution by motion is only available within the five-year period from entry of judgment.

Under Rule 39, Section 6,50 a judgment creditor has two modes in enforcing the court’s judgment. Execution may
be either through motion or an independent action.

These two modes of execution are available depending on the timing when the judgmentcreditor invoked its
right to enforce the court’s judgment. Execution by motion is only available if the enforcement of the judgment
was sought within five (5) years from the date of its entry. On the other hand, execution by independent action is
mandatory if the five-year prescriptive period for execution by motion had already elapsed. 51 However, for
execution by independent action to prosper – the Rules impose another limitation – the action must be filed
before it is barred by the statute of limitations which, under the Civil Code, is ten (10) years from the finality of the
judgment.52

On May 7, 1999, within the five-year period from the trial court’s judgment, petitioner filed its motion for the
issuance of a writ of execution. However, despite the grant of the motion, the court did not issue an actual writ. It
was only onMay 30, 2003 that petitioner filed a second motion to ask again for the writ’s issuance. By this time,
the allowed five-year period for execution by motion had already lapsed.

As will be discussed below, since the second motion was filed beyond the five-year prescriptive period set by the
Rules, then the writ of execution issued by the trial court on July 31, 2003 was null and void for having been
issued by a court already ousted ofits jurisdiction.
Page 154 of 343
In Arambulo v. Court of First Instance of Laguna,53 we explained the rule that the jurisdiction of a court to issue a
writ of execution by motion is only effective within the five-year period from the entry of judgment. Outside this
five-year period, any writ of execution issued pursuant to a motion filed by the judgment creditor, is null and
void. If no writ of execution was issued by the court within the five-year period, even a motion filed within such
prescriptive period would not suffice. A writ issued by the court after the lapse of the five-year period is already
null and void.54 The judgment creditor’s only recourse then is to file an independent action, which must also be
within the prescriptive period set by law for the enforcement of judgments.

This Court subsequently reiterated its Arambuloruling in Ramos v. Garciano, 55 where we said:

There seems to be no serious dispute that the 4th alias writ of execution was issued eight (8) daysafter the lapse
of the five (5) year period from the dateof the entry of judgment in Civil Case No. 367. As a general rule, after the
lapse of such period a judgment may be enforced only by ordinary action, not by mere motion (Section 6, Rule
39, Rules of Court).

xxxx

The limitation that a judgment beenforced by execution within five years, otherwise itloses efficacy, goes tothe
very jurisdiction of the Court.A writ issued after such period is void, and the failure to object thereto does
notvalidate it, for the reason that jurisdiction of courts is solely conferred by law and not by express or implied
will of the parties.56[emphasis supplied]

To clearly restate these rulings, for execution by motion to be valid, the judgment creditor mustensure the
accomplishment of two acts within the five-year prescriptive period. These are:a) the filing of the motion for the
issuance of the writ of execution; and b) the court’s actual issuance of the writ.In the instanceswhen the Court
allowed execution by motion even after the lapse of five years, we only recognized one exception, i.e., when the
delay is caused or occasioned by actions of the judgment debtor and/or is incurred for his benefit or
advantage.57However, petitioner failed toshow or cite circumstances showing how OCWD or Subic Water caused
it to belatedly file its second motion for execution.

Strictly speaking, the issuance of the writ should have been a ministerial duty on the partof the trial court after it
gave its July 23, 1999 order, approving the first motion and directing the issuance of such writ. The petitioner
could have easily compelled the court to actually issue the writ by filing a manifestation onthe existence of the
July 23, 1999 order. However, petitioner idly sat and waited for the five-year period to lapse before it filed its
second motion. Having slept on its rights, petitioner had no one to blame but itself.

A writ of execution cannot affect a non- party to a case.

Strangers to a case are not bound by the judgment rendered in it. Thus, a writ of execution can only beissued
against a party and not against one who did not have his day in court. 58

Subic Water never participated in the proceedings in Civil Case No. 580-0-90, where OCWD and petitioner were
the contending parties. Subic Water only came into the picture when one Atty. Segundo Mangohig, claiming to
beOCWD’s former counsel, manifested before the trial court that OCWD had already been judicially dissolved
and thatSubic Water assumed OCWD’s personality.

In the present case, the compromise agreement, although signed by Mr. Noli Aldip, did not carry the express
conformity of Subic Water. Mr. Aldip was never given any authorization to conform to or bind Subic Water in the
compromiseagreement. Also, the agreement merely labeled Subic Water as a co-maker. It did not contain any
provision where Subic Water acknowledged its solidary liability with OCWD.

Lastly, Subic Water did not voluntarily submit tothe court’s jurisdiction. In fact, the motion it filed was only made
as a special appearance, precisely toavoid the court’s acquisition of jurisdiction over its person. Without any
participation inthe proceedings below, it cannot be made liable on the writ ofexecution issuedby the court a quo.

Page 155 of 343

B. Substantive Law Aspect

Solidary liability mustbe expressly stated.

The petitioner also argued that Subic Water could be held solidarily liable under the writ of execution since it was
identified as OCWD’s co-maker in the compromise agreement.The petitioner’s basis for this is the following
provision of the agreement:

4. Both parties also requestthat Subic Water,Philippines which took over the operations of the defendant
Olongapo City Water District be made as co-makerfor the obligation herein abovecited. 59 [emphasis supplied]

As the rule stands, solidary liability is not presumed. This stems from Art. 1207 of the Civil Code, which provides:

Art. 1207. x x x There is a solidary liability only when the obligation expressly so states, or when the law orthe
nature of the obligation requiressolidarity. [emphasis supplied]

In Palmares v. Court of Appeals,60 the Court did not hesitate to rule that although a party to a promissory note
was onlylabeled as a comaker, his liability was that ofa surety, since the instrument expressly provided for his joint
and several liabilitywith the principal.

In the present case, the joint and several liability of Subic Water and OCWD was nowhere clear in the agreement.
The agreement simply and plainly stated that petitioner and OCWD were only requestingSubic Water to be a co-
maker, in view of its assumption of OCWD’s water operations. No evidence was presented to show that such
request was ever approved by Subic Water’s board of directors.

Under these circumstances, petitioner cannot proceed after Subic Water for OCWD’s unpaid obligations. The law
explicitly states that solidary liability is not presumed and must be expressly provided for. Not being a surety,
Subic Water is not an insurer of OCWD’s obligations under the compromise agreement. At best, Subic Water was
merely a guarantor against whom petitioner can claim, provided it was first shown that: a) petitioner had already
proceeded after the properties of OCWD, the principal debtor; b) and despite this, the obligation under the
compromise agreement, remains to be not fully satisfied. 61 But as will be discussed next, Subic Water could not
also be recognized as a guarantorof OCWD’s obligations.

An officer’s actions can only bind the corporation ifhe had been authorized to do so.

An examination of the compromise agreement reveals that it was not accompanied by any document showing a
grant of authority to Mr. Noli Aldip to sign on behalf of Subic Water.

Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through its board ofdirectors,
which exercises its corporate powers. In this capacity, the general rule is that, in the absence of authority from the
board ofdirectors, no person, not even its officers, can validly bind a corporation. 62 Section 23 of the Corporation
Code provides:

Section 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 trusteesto 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. (28a) [emphasis supplied]

In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 63 we held that under Section 23 of the
Corporation Code, the power and responsibility to decide whether a corporation can enter into a binding
contract is lodged with the board of directors, subject to the articles of incorporation, by-laws, or relevant
provisions of law. As we have clearly explained in another case:

Page 156 of 343

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 courseof the particular business, are incidental to, or
may be implied from, the powers intentionally conferred, powers added bycustom 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 oragent to believe that ithas conferred. 64 [emphasis ours]

Mr. Noli Aldip signedthe compromise agreement purely in his own capacity. Moreover, the compromise
agreement did not expressly provide that Subic Water consented to become OCWD’s co-maker. As worded, the
compromise agreement merely provided that both parties [also]requestSubic Water, Philippines, which took over
the operations of Olongapo City Water District be made asco-maker [for the obligations above-cited].This
request was never forwarded to Subic Water’s board of directors. Even if due notification had been made (which
does not appearin the records), Subic Water’s board does not appear to have given any approval tosuch request.
Nodocument such as the minutes of Subic Water’s board of directors’ meeting or a secretary’s certificate,
purporting to be an authorization to Mr. Aldip to conform to the compromise agreement, was everpresented. In
effect, Mr. Aldip’s act of signing the compromise agreement was outside of his authority to undertake.

Since Mr. Aldip was never authorized and there was no showing that Subic Water’s articles of incorporation or
by-laws granted him such authority, then the compromise agreement he signed cannot bind Subic Water. Subic
Water cannot likewise be made a surety or even a guarantor for OCWD’s obligations. OCWD’s debts under the
compromise agreement are its own corporate obligations to petitioner.

OCWD and Subic Water are two separate and different entities.

Petitioner practically suggests that since Subic Water took over OCWD’s water operations in OlongapoCity, it also
acquired OCWD’s juridical personality, making the two entities one and the same.

This is an interpretation that we cannot make or adopt under the facts and the evidence of this case. Subic Water
clearly demonstrated that it was a separate corporate entity from OCWD. OCWD is just a ten percent (10%)
shareholder of Subic Water. As a mere shareholder, OCWD’s juridical personality cannot be equated nor
confused with that ofSubic Water. It is basic in corporation law that a corporation is a juridical entity vested with a
legal personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it.65 Under this corporate reality, Subic Water cannot be held liable for OCWD’s corporate obligations
in the same manner that OCWD cannot be held liable for the obligations incurred by Subic Water as a separate
entity. The corporate veilshould not and cannot be pierced unless it is clearly established that the separate and
distinct personality of the corporation was used to justify a wrong, protect fraud, or perpetrate a deception. 66

In Concept Builders, Inc. v. NLRC,67 the Court enumerated the possible probative factors of identity which could
justify the application of the doctrine of piercing the corporate veil. These are:

(1) Stock ownership by one or common ownership of both corporations;

(2) Identity of directors and officers;

(3) The manner of keeping corporate books and records; and

(4) Methods of conducting the business. 68

The burden of proving the presence of any of these probative factors lies with the one alleging it. Unfortunately,
petitioner simply claimed that Subic Water took over OCWD's water operations in Olongapo City. Apart from this
allegation, petitioner failed to demonstrate any link to justify the construction that Subic Water and OCWD are
one and the same.

Under this evidentiary situation, our duty is to respect the separate and distinct personalities of these two juridical
entities.1âwphi1
Page 157 of 343
We thus deny the present petition. The writ of execution issued by RTC Olongapo, Br. 75, in favor of Olongapo
City, is hereby confirmed to be null and void. Accordingly, respondent Subic Water cannot be made liable under
this writ.

WHEREFORE, premises considered, we hereby DISMISS the petition. The Court of Appeals' decision dated July 6,
2005 and resolution dated January 3, 2006, annulling and setting aside the orders of the Regional Trial Court of
Olongapo, Branch 75 dated July 29, 2003 and October 7, 2003, and the writ of execution dated July 31, 2003, are
hereby AFFIRMED. Costs against the City of Olongapo.

SO ORDERED.

ARTURO D. BRION
Associate Justice

G.R. No. 174353 September 10, 2014

NESTOR CHING and ANDREW WELLINGTON, Petitioners,

vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU,
HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of the
Decision1dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No. 81441, which affirmed the
Order2 dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No. 03-001
dismissing the Complaint filed by herein petitioners.

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint 3 with the RTC of
Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said
country club and its Board of Directors and officers under the provisions of Presidential Decree No. 902-A in
relation to Section 5.2 of the Securities Regulation Code. The Subic Bay Golfers and Shareholders Incorporated
(SBGSI), a corporation composed of shareholders of the defendant corporation, was also named as plaintiff. The
officers impleaded as defendants were the following: (1) itsPresident, Hu Ho Hsiu Lien alias Susan Hu; (2) its
treasurer, Hu Tsung Chieh alias Jack Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui
and Hu Tsung Tzu. The case was docketed as Civil Case No. 03-001. The complaint alleged that the defendant
corporation sold shares to plaintiffs at US$22,000.00 per share, presenting to them the Articles of Incorporation
which contained the following provision:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in
their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the Club at the time of its
dissolution or liquidation.4

However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the Securities and
Exchange Commission (SEC), wherein the above provision was changed as follows:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in
their favor. In accordance with the Lease and Development Agreement by and between Subic Bay Metropolitan
Authority and The Universal International Group of Taiwan, where the golf courseand clubhouse component
thereof was assigned to the Club, the shareholders shall not have proprietary rights or interests over the
properties of the Club.5x x x. (Emphasis supplied.)

Page 158 of 343

Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above amendment
which allegedly makes the shares non-proprietary, as it takes away the rightof the shareholders to participate in
the pro-rata distribution of the assets of the corporation after its dissolution. According to petitioners, this is in
fraud of the stockholders who only discovered the amendment when they filed a case for injunction to restrain
the corporation from suspending their rights to use all the facilities of the club. Furthermore, petitioners alleged
that the Board of Directors and officers of the corporation did not call any stockholders’ meeting from the time of
the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation. Neither
did the defendant directors and officers furnish the stockholders with the financial statements of the corporation
nor the financial report of the operation of the corporation in violation of Section 75 of the Corporation Code.
Petitioners also claim that on August 15, 1997, SBGCCI presented to the SEC an amendment to the By-Laws of the
corporation suspending the voting rights of the shareholders except for the five founders’ shares. Said
amendment was allegedly passed without any stockholders’ meeting or notices to the stockholders in violation of
Section 48 of the Corporation Code.

The Complaint furthermore enumerated several instances of fraud in the management of the corporation
allegedly committed by the Board of Directors and officers of the corporation, particularly:

a. The Board of Directors and the officers of the corporation did not indicate in its financial report for the
year 1999 the amount of ₱235,584,000.00 collected from the subscription of 409 shareholders who paid
U.S.$22,000.00 for one (1) share of stock at the then prevailing rate of ₱26.18 to a dollar. The stockholders
were not informed how these funds were spent or its whereabouts.

b. The Corporation has been collecting green fees from the patrons of the golf course at an average sum
of ₱1,600.00 per eighteen (18) holes but the income is not reported in their yearly report. The yearly
report for the year 1999 contains the report of the Independent Public Accountant who stated that the
company was incorporated on April 1, 1996 but has not yet started its regular business operation. The
golf course has been in operation since 1997 and as such has collected green fees from non-members
and foreigners who played golf in the club. There is no financial report as to the income derived from
these sources.

c. There is reliable information that the Defendant Corporation has not paid its rentals to the Subic Bay
Metropolitan Authority which up to the present is estimated to be not less than one (1) million U.S.
Dollars. Furthermore, the electric billings of the corporation [have] not been paid which amounts also to
several millions of pesos.

d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and presently the
club is operating without any valid contract with SBMA. The defendant was ordered by the Supreme
Court to yield the possession, the operation and the management of the golf course to SBMA. Up to now
the defendants [have] defied this Order.

e. That the value of the shares of stock of the corporation has drastically declined from its issued value of
U.S.$22,000.00 to only Two Hundred Thousand Pesos, (₱200,000.00) Philippine Currency. The
shareholders [have] lost in terms ofinvestment the sum estimated to be more than two hundred
thousand pesos.This loss is due to the fact that the Club is mismanaged and the golf course is poorly
maintained. Other amenities of the Club has (sic) not yet been constructed and are not existing despite
the lapse of morethan five (5) years from the time the stocks were offered for sale to the public. The
cause of the decrease in value of the sharesof stocks is the fraudulent mismanagement of the club. 6

Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the corporation,
petitioners prayed in their Complaint for the following:

WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining order be
issued enjoining the defendants from acting as Officers and Board of Directors of the Corporation. After
hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as Board of Directors and Officers

Page 159 of 343

of the Corporation. In the meantime a Receiver be appointed by the Court to act as such until a duly constituted
Board of Directors and Officers of the Corporation be elected and qualified.

That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand Pesos each
representing the decrease in value of their shares of stocks plus the sum of ₱100,000.00 as legal expense and
attorney’s fees, as well as appearance fee of ₱4,000.00 per hearing.7

In their Answer, respondents specifically denied the allegations of the Complaint and essentially averred that:

(a) The subscriptions of the 409 shareholders were paid to Universal International Group Development
Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs and other shareholders
bought their shares;8

(b) Contrary to the allegations in the Complaint, said subscriptions were reflected inSBGCCI’s balance
sheets for the fiscal years 1998 and 1999;9

(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their shares were
purchased after the amendment of the Articles of Incorporation and such amendment was publicly
known to all members prior and subsequent to the said amendment; 10

(d) Shareholders’ meetingshad been held and the corporate acts complained of were approved at
shareholders’ meetings;11

(e) Financial statements of SBGCCI had always been presented to shareholders justifiably requesting
copies;12

(f) Green fees collected were reported in SBGCCI’s audited financial statements; 13

(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to operate under a
valid contract with the SBMA;14 and

(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of members’
shares have increased.15

Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was authorized by SBGSI
to file the Complaint on the said corporation’s behalf; (b) to comply with the requisites for filing a derivative suit
and an action for receivership; and (c) to justify their prayer for injunctive relief since the Complaint may be
considered a nuisance or harassment suit under Section 1(b), Rule1 of the Interim Rules of Procedure for Intra-
Corporate Controversies.16 Thus, they prayed for the dismissal of the Complaint.

On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is a derivative
suit, explaining thus:

The Court finds that this case is intended not only for the benefit of the two petitioners. This is apparentfrom the
caption of the case which reads Nestor Ching, Andrew Wellington and the Subic Bay Golfers and Shareholders,
Inc., for and in behalf of all its members as petitioners. This is also shown in the allegations of the petition[.] x x x.

On the bases of these allegations of the petition, the Court finds that the case is a derivative suit. Being a
derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members may bring an action
in the name of the corporation or association provided that he (the minority stockholder) exerted all reasonable
efforts and allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies available under
the articles of incorporation, by-laws or rules governing the corporation or partnership to obtain the reliefs he
desires. An examination of the petition does not show any allegation that the petitioners applied for redress to
the Board of Directors of respondent corporation there being no demand, oralor written on the respondents to
address their complaints. Neither did the petitioners appl[y] for redress to the stockholders of the respondent
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corporation and ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should have asked
the Board of Directors of the respondent corporation and/or its stockholders to hold a meeting for the taking up
of the petitioners’ rights in this petition. 17

The RTC held that petitioners failed to exhaust their remedies within the respondent corporation itself. The RTC
further observed that petitioners Ching and Wellington were not authorized by their co-petitioner Subic Bay
Golfers and Shareholders Inc. to filethe Complaint, and therefore had no personality to file the same on behalf
ofthe said shareholders’ corporation. According to the RTC, the shareholdings of petitioners comprised of two
shares out of the 409 alleged outstanding shares or 0.24% is an indication that the action is a nuisance or
harassment suit which may be dismissed either motu proprio or upon motion in accordance with Section 1(b) of
the Interim Rules of Procedure for Intra-Corporate Controversies.18

Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed as CA-G.R. CV
No. 81441. On October 27, 2005, the Court of Appeals rendered the assailed Decision affirming that of the RTC.

Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint they filed with
the RTC was not a derivative suit. They claim that they filed the suit in their own right as stockholders against the
officers and Board of Directors of the corporation under Section 5(a) of Presidential DecreeNo. 902-A, which
provides:

Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing
laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers
or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the
public and/or of the stockholders, partners, members of associations or organizations registered with the
Commission.

According to petitioners, the above provision (which should be read in relation to Section 5.2 of the Securities
Regulation Code which transfers jurisdiction over such cases to the RTC) allows any stockholder to file a
complaint against the Board of Directors for employing devices or schemes amounting to fraud and
misrepresentation which is detrimental to the interest of the public and/or the stockholders.

In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it should
nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies within the
corporation. Petitioners cite Republic Bank v. Cuaderno 19 wherein the Court allowed the derivative suit even
without the exhaustion of said remedies as it was futile to do so since the Board ofDirectors were all members of
the same family. Petitioners also point out that in Cuadernothis Court held that the fact that therein petitioners
had only one share of stock does not justify the denial of the relief prayed for.

To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies on petitioners’
part, they claim that they filed in Court a case for Injunction docketed as Civil Case No. 103-0-01, to restrain the
corporation from suspending their rights to use all the facilities of the club, on the ground that the club cannot
collect membership fees until they have completed the amenities as advertised when the shares of stock were
sold to them. They allegedly asked the Club to produce the minutes of the meeting of the Board of Directors
allowing the amendments of the Articles of Incorporation and By-Laws. Petitioners likewise assail the dismissal of
the Complaint for being a harassment ornuisance suit before the presentation of evidence. They claim that the
evidence they were supposed to present will show that the members of the Board of Directors are not qualified
managers of a golf course.

We find the petition unmeritorious.

At the outset, it should be noted thatthe Complaint in question appears to have been filed only by the two
petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in the respondent
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corporation SBGCCI. While the caption of the Complaint also names the "Subic Bay Golfers and Shareholders Inc.
for and in behalf of all its members," petitioners did not attach any authorization from said alleged corporation or
its members to file the Complaint. Thus, the Complaint is deemed filed only by petitioners and not by SBGSI.

On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine that the nature
of an action, as well as which court or body has jurisdiction over it, isdetermined based on the allegations
contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon
all or some of the claims asserted therein. 20

We have also held that the body rather than the title of the complaint determines the nature of an action. 21

In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit, anindividual suit,
and a representative or class suit:

A derivative suit must be differentiated from individual and representative or class suits, thus:

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

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by law with
the right to decide whether or notthe corporation should sue, and they will never be willing to sue themselves.
The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation,
the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an effective remedy of the minority
against the abuses of management. Thus, an individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue orare the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in interest."

xxxx

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and individual
and class suits, on the other, are mutually exclusive, viz.:

"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for the benefit of the
corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise
be redressed because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in the corporate right,
if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property
without any severance or distribution among individual holders, or it seeks to recover assets for the corporation
or to prevent the dissipation of its assets.’ x x x. In contrast, "a directaction [is one] filed by the shareholder
individually (or on behalf of a classof shareholders to which he or she belongs) for injury to his or her interestas a
shareholder. x x x. [T]he two actions are mutually exclusive: i.e., the right of action and recovery belongs to either
the shareholders (direct action) *651 or the corporation(derivative action)." x x x.
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Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other shareholder of the
corporation negligently managed the business, resulting in its total failure. x x x. The appellate court concluded
that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is injury to
the whole body of its stockholders, it was for the corporation to institute and maintain a remedial action. x x x. A
derivative action would have been appropriate if its responsible officials had refused or failed to act." x x x. The
court wenton to note that the damages shown at trial were the loss of corporate profits. x x x. Since
"[s]hareholders own neither the property nor the earnings of the corporation," any damages that the plaintiff
alleged that resulted from such loss of corporate profits "were incidental to the injury to the corporation."
(Citations omitted.)

The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board of
Directors of the corporation, the appointment of a receiver, and the prayer for damages in the amount of the
decrease in the value of the sharesof stock, clearly show that the Complaint was filed to curb the alleged
mismanagement of SBGCCI. The causes of action pleaded by petitioners do not accrue to a single shareholder or
a class of shareholders but to the corporation itself.

However, as minority stockholders, petitioners do not have any statutory right to override the business judgments
of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lackof qualification to manage a
golf course. Contraryto the arguments of petitioners, Presidential Decree No. 902-A, which is entitled
REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND
PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT,
does not grant minority stockholders a cause of action against waste and diversion by the Board of Directors, but
merely identifies the jurisdiction of the SEC over actionsalready authorized by law or jurisprudence. It is settled
that a stockholder’s right to institute a derivative suit is not based on any express provisionof the Corporation
Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its stockholders for violation of their
fiduciary duties.23

At this point, we should take note that while there were allegations in the Complaint of fraud in their subscription
agreements, such as the misrepresentation of the Articles of Incorporation, petitioners do not pray for the
rescission of their subscription or seekto avail of their appraisal rights. Instead, they ask that defendants be
enjoined from managing the corporation and to pay damages for their mismanagement. Petitioners’ only
possible cause of action as minority stockholders against the actions of the Board of Directors is the common law
right to file a derivative suit. The legal standing of minority stockholders to bring derivative suits is not a statutory
right, there being no provision in the Corporation Code or related statutes authorizing the same, but is instead a
product of jurisprudence based on equity. However, a derivative suit cannot prosper without first complying with
the legal requisites for its institution. 24

Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies imposes the following
requirements for derivative suits:

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

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

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

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

The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.

Page 163 of 343

Upon a careful examination of the Complaint, this Court finds that the same should not have been dismissed on
the ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners are indeed only two
out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a
minority of stockholders file a derivative suit for and in behalf of a corporation. 25

With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the
Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they desire. The
Complaint contained no allegation whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if
petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the Complaint is
not a useless formality which may be disregarded at will. 1âwphi1 We ruled in Yu v. Yukayguan26:

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are
simple and do not leave room for statutory construction. The second paragraph thereof requires that the
stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies
availableunder the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires; and to allege such fact with particularityin the complaint. The obvious intent behind
the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the
relief sought had failed.

WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
81441 which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City dismissing the Complaint filed
thereon by herein petitioners is AFFIRMED.

SO ORDERED.

TERESITA J.LEONARDO-DE CASTRO**

Acting Chairperson, Associate Justice

G.R. No. 182770 September 17, 2014

WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,

vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:

We review in this petition for review on certiorari 1 the decision2 dated September 28, 2007 and the
resolution3 dated April 28, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 68289 that affirmed with
modification the decision4 of the Regional Trial Court (RTC), Branch 77, Quezon City.

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management and consultant
firm. The petitioner, WPM International Trading, Inc. (WPM), is a domestic corporation engaged in the restaurant
business, while Warlito P. Manlapaz (Manlapaz) is its president.

Sometime in 1990, WPM entered into a management agreement with the respondent, by virtue of which the
respondent was authorized to operate, manage and rehabilitate Quickbite, a restaurant owned and operated by
WPM. As part of her tasks, the respondent looked for a contractor who would renovate the two existing Quickbite
outlets in Divisoria, Manila and Lepanto St., University Belt, Manila. Pursuant to the agreement, the respondent
Page 164 of 343
engaged the services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost of
₱432,876.02.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession was delivered to the
respondent. However, out of the ₱432,876.02 renovation cost, only the amount of ₱320,000.00 was paid to CLN,
leaving a balance of ₱112,876.02.

Complaint for Sum of Money (Civil Case No. Q-90-7013)

On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC against the
respondent and Manlapaz, which was docketed as Civil Case No. Q-90-7013. CLN later amended the complaint to
exclude Manlapaz as defendant. The respondent was declared in default for her failure to file a responsive
pleading.

The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual damages inthe amount of
₱112,876.02 with 12% interest per annum from June 18,1990 (the date of first demand) and 20% of the amount
recoverable as attorney’s fees.

Complaint for Damages (Civil Case No. Q-92-13446)

Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and Manlapaz. The
respondent alleged that in Civil Case No. Q-90-7013, she was adjudged liable for a contract that she entered into
for and in behalf of the petitioners, to which she should be entitled to reimbursement; that her participation in
the management agreement was limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri), CLN’s
general manager; that it was actually Manlapaz and Neri who agreed on the terms and conditions of the
agreement; that when the complaint for damages was filed against her, she was abroad; and that she did not
know of the case until she returned to the Philippines and received a copy of the decision of the RTC.

In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus interest at 12%per annum
from June 18, 1990 until fully paid; and 20% of the award as attorney’s fees. She likewise prayed that an award of
₱100,000.00 as moral damages and ₱20,000.00 as attorney’s fees be paid to her.

In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was in-charge
with the daily operations of the Quickbite outlets; that when Alcansaje left WPM, the remaining directors were
compelled to hire the respondent as manager; that the respondent had entered intothe renovation agreement
with CLN in her own personal capacity; that when he found the amount quoted by CLN too high, he instructed
the respondent to either renegotiate for a lower price or to look for another contractor; that since the respondent
had exceeded her authority as agent of WPM, the renovation agreement should only bind her; and that since
WPM has a separate and distinct personality, Manlapaz cannot be made liable for the respondent’s claim.

Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of counterclaim, for
the award of ₱350,000.00 as moral and exemplary damages and ₱50,000.00 attorney’s fees.

The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a responsive
pleading.

The Decision of the RTC

In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The RTC found that
based on the records, there is a clear indication that WPM is a mere instrumentality or business conduit of
Manlapaz and as such, WPM and Manlapaz are considered one and the same. The RTC also found that Manlapaz
had complete control over WPM considering that he is its chairman, president and treasurer at the same time.
The RTC thus concluded that Manlapaz is liable in his personal capacity to reimburse the respondent the amount
she paid to CLN inconnection with the renovation agreement.

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The petitioners appealed the RTC decision with the CA. There, they argued that in view of the respondent’s act of
entering into a renovation agreement with CLN in excess of her authority as WPM’s agent, she is not entitled to
indemnity for the amount she paid. Manlapaz also contended that by virtue ofWPM’s separate and distinct
personality, he cannot be madesolidarily liable with WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees, the decision of the
RTC.The CA held that the petitioners are barred from raising as a defense the respondent’s alleged lack of
authority to enter into the renovation agreement in view of their tacit ratification of the contract.

The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based on the following:
(1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz had complete control over WPM because he
concurrently held the positions of president, chairman of the board and treasurer, in violation of the Corporation
Code; (3) two of the four other stockholders of WPM are employed by Manlapaz either directly or indirectly; (4)
Manlapaz’s residence is the registered principal office of WPM; and (5) the acronym "WPM" was derived from
Manlapaz’s initials. The CA applied the principle of piercing the veil of corporate fiction and agreed with the RTC
that Manlapaz cannot evade his liability by simply invoking WPM’s separate and distinct personality.

After the CA's denial of their motion for reconsideration, the petitioners filed the present petition for review on
certiorari under Rule 45 of the Rules of Court.

The Petition

The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the principle of piercing
the veil of corporate fiction. They argue that the legal fiction of corporate personality could only be discarded
upon clear and convincing proof that the corporation is being used as a shield to avoid liability or to commit a
fraud. Since the respondent failed to establish that any of the circumstances that would warrant the piercing is
present, Manlapaz claims that he cannot be made solidarily liable with WPM to answerfor damages allegedly
incurred by the respondent.

The petitioners further argue that, assuming they may be held liable to reimburse to the respondentthe amount
she paid in Civil Case No. Q-90-7013, such liability is only limited to the amount of ₱112,876.02, representing the
balance of the obligation to CLN, and should not include the twelve 12% percent interest, damages and
attorney’s fees.

The Issues

The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz; and
(2) whether Manlapaz is jointly and severally liable with WPM to the respondent for reimbursement, damages and
interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of whether a corporation is a mere instrumentality or alter-ego of
another is purely one of fact.5 This is also true with respect to the question of whether the totality of the evidence
adduced by the respondentwarrants the application of the piercing the veil of corporate fiction doctrine.6

Generally, factual findings of the lower courts are accorded the highest degree of respect, if not finality. When
adopted and confirmed by the CA, these findings are final and conclusive and may not be reviewed on
appeal,7save in some recognized exceptions 8 among others, when the judgment is based on misapprehension of
facts.

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We have reviewed the records and found that the application of the principle of piercing the veil of corporate
fiction is unwarranted in the present case.

On the Application ofthe Principle of Piercing the Veil of Corporate Fiction

The rule is settled that a corporation has a personality separate and distinct from the persons acting for and in its
behalf and, in general, from the people comprising it.9 Following this principle, the obligations incurred by the
corporate officers, orother persons acting as corporate agents, are the direct accountabilities ofthe corporation
they represent, and not theirs. Thus, a director, officer or employee of a corporation is generally not held
personally liable for obligations incurred by the corporation; 10 it is only in exceptional circumstances that solidary
liability will attach to them.

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when
the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to
justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs so conducted as to make it merely aninstrumentality, agency, conduit or
adjunct of another corporation.11

Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have beenused by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.

The absence of any ofthese elements prevents piercing the corporate veil. 12

In the present case, the attendantcircumstances do not establish that WPM is a mere alter ego of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was
organized and controlled, and its affairs conducted in a manner that made it merely an instrumentality, agency,
conduit or adjunct ofManlapaz. As held in Martinez v. Court of Appeals, 13 the mere ownership by a
singlestockholder of even all or nearly all of the capital stocks ofa corporation is not by itself a sufficient ground
to disregard the separate corporate personality. To disregard the separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established. 14

Likewise, the records of the case do not support the lower courts’ finding that Manlapaz had control or
domination over WPM or its finances. That Manlapaz concurrentlyheld the positions of president, chairman and
treasurer, or that the Manlapaz’s residence is the registered principal office of WPM, are insufficient
considerations to prove that he had exercised absolutecontrol over WPM.

In this connection, we stress thatthe control necessary to invoke the instrumentality or alter ego rule is not
majority or even complete stock control but such domination of finances, policies and practices that the
controlled corporation has, so tospeak, no separate mind, will or existence of its own, and is but a conduit for its
principal. The control must be shown to have been exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the
complaint is made.
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Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over
WPM.1âwphi1 Even granting that he exercised a certain degree of control over the finances, policies and practices
of WPM, in view of his position as president, chairman and treasurer of the corporation, such control does not
necessarily warrant piercing the veil of corporate fiction since there was not a single proof that WPM was formed
to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.

On the contrary, the evidence establishes that CLN and the respondent knew and acted on the knowledgethat
they were dealing with WPM for the renovation of the latter’s restaurant, and not with Manlapaz. That WPM later
reneged on its monetary obligation to CLN, resulting to the filing of a civil case for sum of money against the
respondent, does not automatically indicate fraud, in the absence of any proof to support it.

This Court also observed that the CA failed to demonstrate how the separate and distinct personalityof WPM was
used by Manlapaz to defeat the respondent’s right for reimbursement. Neither was there any showing that WPM
attempted to avoid liability or had no property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the latter could be held
solidarily liable with WPM, and considering that there was no proof that WPM had insufficient funds, there was no
sufficient justification for the RTC and the CA to have ruled that Manlapaz should be held jointly and severally
liable to the respondent for the amount she paid to CLN. Hence, only WPM is liable to indemnify the respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must be done
with caution.15 It can only be done if it has been clearly established that the separate and distinct personality of
the corporation is used to justify a wrong, protect fraud, or perpetrate a deception. The court must be certain that
the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of its rights; it cannot be presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to pay a just
debt. Under Article 2220 of the New Civil Code, 16 moral damages may be awarded in cases of a breach of
contract where the defendant acted fraudulently or in bad faith or was guilty of gross negligence amounting to
bad faith.

In the present case, when payment for the balance of the renovation cost was demanded, WPM, instead of
complying with its obligation, denied having authorized the respondent to contract in its behalf and accordingly
refused to pay. Such cold refusal to pay a just debt amounts to a breach of contract in bad faith, as contemplated
by Article 2220. Hence, the CA's order to pay moral damages was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of Appeals in CA-G.R.
CV No. 68289 is MODIFIED and.that petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the
renovation agreement.

SO ORDERED.

ARTURO D. BRION
Associate Justice

G.R. No. 172843 September 24, 2014

ALFREDO L. VILLAMOR, JR., Petitioner,

vs.
JOHN S. UMALE, in substitution of HERNANDO F. BALMORES, Respondent.

x-----------------------x

Page 168 of 343

G.R. No. 172881

ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners,

vs.
HERNANDO F. BALMORES, Respondent.

DECISION

LEONEN, J.:

Before us is a petition for review on certiorari 1 under Rule 45 of the Rules of Court, assailing the decision 2 of the
Court of Appeals dated March 2, 2006 and its resolution 3 dated May 29, 2006, denying petitioners’ motions for
reconsideration. The Court of Appeals placed Pasig Printing Corporation (PPC) under receivership and appointed
an interim management committee for the corporation. 4

MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area owned
by Mid-Pasig Development Corporation (Mid-Pasig).5

On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, including the Rockland area. 6

On November 11, 2004, PPC’s board of directors issued a resolution 7 waiving all its rights, interests, and
participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr. (Villamor),
petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of Villamor’s law firm.8

On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA) with
MC Home Depot.9 Under the MOA, MC Home Depot would continue to occupy the area as PPC’s sublessee for
four (4) years, renewable for another four (4) years, at a monthly rental of ₱4,500,000.00 plus goodwill of
₱18,000,000.00.10

In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing
rentalpayments for one year and the goodwill money. The checks were given to Villamor who did not turn these
or the equivalent amount over to PPC, upon encashment. 11

Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a stockholder and director of
PPC,12wrote a letter addressed to PPC’s directors, petitioners inG.R. No. 172881, on April 4, 2005.13 He informed
them that Villamor should bemade to deliver to PPC and account for MC Home Depot’s checks or their
equivalent value.14

Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court an intra-
corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate
Controversies15 (Interim Rules) against petitioners for their alleged devices or schemes amounting to fraud or
misrepresentation "detrimental to the interest of the corporation and its stockholders." 16

Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s assets were ". . . not only
in imminent danger, but have actually been dissipated,lost, wasted and destroyed." 17

Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He also prayed for
petitioners’ prohibition from "selling, encumbering, transferring or disposing in any manner any of [PPC’s]
properties, including the MC Home [Depot] checks and/or their proceeds." 19 He prayed for the accounting and
remittance to PPC of the MC Home Depot checks or their proceeds and for the annulment of the board’s
resolution waiving PPC’s rights in favor of Villamor’s law firm. 20

Ruling of the Regional Trial Court

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In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores’ prayer for the
appointment of a receiver or the creation of a management committee.The dispositive portion reads:

WHEREFORE, premises considered the appointment of a Receiver and the creation of a Management Committee
applied for by plaintiff Hernando F. Balmores are, as they are hereby, DENIED. 22 (Emphasis in the original)

According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by PPC’s board
of directors, waiving its rights to the option to lease contract infavor of Villamor’s law firm, must be accorded
prima facie validity.23

The trial court also noted that there was a pending case filed by one Leonardo Umale against Villamor, involving
the same checks. Umale was also claiming ownership of the checks. 24 This, according to the trial court, weakened
respondent Balmores’ claim that the checks were properties of PPC. 25

The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage, or
destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders, partieslitigants
or the general public."26 The board’s failure to recover the disputed amounts was not an indication of
mismanagement resulting in the dissipation of assets. 27

The trial court noted that PPC was earning substantial rental income from its other sub-lessees.28

The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as an
indispensable party, without which, there would be no final determination of the action. 29

Ruling of the Court of Appeals

Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules of
Court.30He assailed the decision of the trial court, which denied his "application for the appointment of a
[r]eceiver and the creation ofa [m]anagement [c]ommittee." 31

In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent Balmores’
petition. It reversed the trial court’s decision, and issued a new order placing PPC under receivership and creating
an interim management committee.32 The dispositive portion reads:

WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE COURSE and the
June 15, 2005 Order/Resolution of the commercial court, the Regional Trial Court of Pasig City, Branch 167, in
S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE and a NEW ORDER is ISSUED that, during the
pendency of the derivative suit, untiljudgment on the merits is rendered by the commercial court, in order
toprevent dissipation, loss, wastage or destruction of the assets, in order to prevent paralization of business
operations which may be prejudicial to the interest of stockholders, parties-litigants or the general public, and in
order to prevent violations of the corporation laws: (1) Pasig Printing Corporation (PPC) is hereby placed under
receivership pursuant to the Rules Governing Intra-Corporate Controversies under R.A. No. 8799;(2) an Interim
Management Committee is hereby created for Pasig Printing Corporation (PPC) composed of Andres Narvasa, Jr.,
Atty. Francis Gustilo and Ms Rosemarie Salvio-Leonida; (3) the interim management committee is hereby directed
to forthwith, during the pendency of the derivative suit until judgment on the merits is rendered by the
commercial court, to: (a) take over the business of Pasig Printing Corporation (PPC), (b) take custody and control
of all assets and properties owned and possessed by Pasig Printing Corporation (PPC), (c) take the place of the
management and the board of directors of Pasig Printing Corporation (PPC), (d) preserve Pasig Printing
Corporation’s assets and properties, (e) stop and prevent any disposal, in any manner, of any of the properties of
Pasig Printing Corporation (PPC) including the MC Home Depot checks and/or their proceeds; and (3) [sic]
restore the status quo ante prevailing by directing respondents their associates and agents to account and return
to the Interim Management Committee for Pasig Printing Corporation (PPC) all the money proceeds of the 20
MC Home Depot checks taken by them and to account and surrender to the Interim Management Committee all
subsequent MC Home Depot checks or proceeds.33(Citation omitted)

Page 170 of 343

The Court of Appeals characterizedthe assailed order/resolution of the trial court as an interlocutory order that is
not appealable.34 In reversing the trial court order/resolution, the Court of Appeals considered the danger of
dissipation, wastage, and loss of PPC’s assets if the review of the trial court’s judgment would be delayed. 35

The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a derivative suit
because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors]." 36

According to the Court of Appeals,the trial court abandoned its duty to the stockholders in a derivative suit when
it refused to appoint a receiver or create a management committee, all during the pendency of the proceedings.
The assailed order ofthe trial court removed from the stockholders their right, in an intra-corporate controversy,
to be allowed the remedy of appointment of a receiverduring the pendency of a derivative suit, leaving the
corporation under the control of an outsider and its assets prone to dissipation. 37 The Court of Appeals also ruled
that this amounts to "despotic, capricious, or whimsicalexercise of judicial power" 38 on the part of the trial court.

In justifying its decision to place PPCunder receivership and to create a management committee, the Court of
Appeals stated that the board’s waiver of PPC’s rights in favor ofVillamor’s law firm without any consideration and
its inaction on Villamor’s failure to turn over the proceeds of rental payments to PPC warrant the creation of a
management committee.39 The circumstances resulted in the imminent danger of loss, waste, or dissipation of
PPC’s assets.40

Petitioners filed separatemotions for reconsideration. Both motions were denied by the Court of Appeals on May
29, 2006. The dispositive portion of the Court of Appeals’ resolution reads:

WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006 Motions for Reconsideration are
hereby DENIED.41

Petitioners filed separatepetitions for review under Rule 45, raising the following threshold issues:

I. Whether the Court of Appeals correctly characterized respondent Balmores’ action as a derivative suit

II. Whether the Court of Appeals properly placed PPC under receivership and created a receiver or
management committee

PPC’s directors argued that the Court of Appeals erred in characterizing respondent Balmores’ suit as a derivative
suit because of his failure to implead PPC as party in the case. Hence, the appellate court did not acquire
jurisdiction over the corporation, and the appointment of a receiver or management committee is not valid. 42

The directors further argued that the requirements for the appointment of a receiver or management committee
under Rule 943 of the Interim Rules were not satisfied. The directors pointed out that respondent Balmores failed
to prove that the assets of the corporation were in imminent danger of being dissipated. 44

According to the directors, assuming that a receiver or management committee may be appointed in the case, it
is the Regional Trial Court only and not the Court of Appeals that must appoint them. 45

Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was still in dispute. In a
separate civil case against Villamor, a certain Leonardo Umale was claiming ownership of the checks. 46

Villamor also argued that the Court of Appeals’ order to place PPC under receivership and to appoint a
management committee does not endanger PPC’s assets because the MC Home Depot checks were not the only
assets of PPC.47 Therefore, it would not affect the operation of PPC or result in its paralysation. 48

In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions raise questions of facts,
which cannot be allowed in a petition for review under Rule 45. 49

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On the appointment of a receiver or management committee, respondent Balmores stated that the ". . . very
practice of waiving assets and income for no consideration can in factlead, not only to the paralyzation of
business, but to the complete loss or cessation of business of PPC[.] It is

precisely because of this fraudulent practice that a receiver/management committee must be appointed to
protect the assets of PPC from further fraudulent acts, devices and schemes."50

The petitions have merit.

Petition for review on

certiorari under Rule 45 was proper

First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari under Rule 45.

Respondent Balmores argued that the petition raises questions of fact.

Under Rule 45, only questionsof law may be raised. 51 There is a question of law "when there is doubt or
controversy as to what the law is on a certain [set] of facts." 52 The test is "whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence." 53 Meanwhile, there is a question of fact
when there is "doubt . . . as to the truth or falsehood of facts." 54 The question must involve the examination of
probative value of the evidence presented.

In this case, petitioners raise issues on the correctness of the Court of Appeals’ conclusions. Specifically,
petitioners ask (1) whether respondent Balmores’ failure to implead PPC in his action with the trial court was fatal;
(2) whether the Court of Appeals correctly characterized respondent Balmores’ action as a derivative suit; (3)
whether the Court of Appeals’ appointment of a management committee was proper; and (4) whether the Court
of Appeals may exercise the power to appoint a management committee.

These are questions of law that may be determined without looking into the evidence presented. The question of
whether the conclusion drawn by the Court of Appeals from a set of facts is correct is a question of law,
cognizable by this court.55

Petitioners, therefore, properly filed a petition for review under Rule 45.

II

Respondent Balmores’ action

in the trial court is not a derivative suit

A derivative suit is an action filed by stockholders to enforce a corporate action. 56 It is an exception to the general
rule that the corporation’s power to sue 57 is exercised only by the board of directors or trustees. 58

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of
the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in
control of the corporation.59 It is allowed when the "directors [or officers] are guilty of breach of . . . trust, [and]
not of mere error of judgment."60

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal
party.61

Thus, this court noted:

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The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. In effect, the suit isan action for specific performance of an obligation, owed
by the corporation to the stockholders, to assist its rights of action when the corporation has been put in default
by the wrongful refusal of the directors or management to adopt suitable measures for its protection. 62

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules) provides the
five (5) requisites63 for filing derivative suits:

SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:

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

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

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

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

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph
of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be "in the name
of [the] corporation or association. . . ." This requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., 64 this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the
corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action
on behalf of the corporation and all other shareholders similarly situated who wish to join [him]." 65 This principle
on derivative suits has been repeated in, among other cases, Tam Wing Tak v. Hon. Makasiar and De Guia 66 and
in Chua v. Court of Appeals,67 which was cited in Hi-Yield Realty, Incorporated v. Court of

Appeals.68

Moreover, it is important that the corporation be made a party to the case. 69

This court explained in Asset Privatization Trust v. Court of Appeals 70 why it is a condition sine qua nonthat the
corporation be impleaded as party in derivative suits. Thus:

Not only is the corporation an indispensible party, but it is also the present rule that it must be served with
process. The reason given is that the judgment must be made binding upon the corporation inorder that the
corporation may get the benefit of the suit and may not bring a subsequent suit against the same defendants for
the same cause of action. In other words the corporation must be joined as party because it is its cause of action
that is being litigated and because judgment must be a res judicata against it. 71

In the same case, this court enumerated the reasons for disallowing a direct individual suit.

The reasons given for not allowing direct individual suit are:

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 (1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit of the
stockholders." Inother words, to allow shareholders to sue separately would conflict with the separate
corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case
of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally donein view of Section 16 of the Corporation Law. . .";

(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all
concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act. 72

While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations is based
on equity, the above legal requisites for its filing must necessarily be complied with for its institution. 73

Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a derivative suit.

Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried
to communicate with PPC’s directors about the checks in Villamor’s possession before he filed an action with the
trial court, respondent Balmores was not able to show that this comprised all the remedies available under the
articles of incorporation, bylaws, laws, or rules governing PPC.

An allegation that appraisal rights were not available for the acts complained of is another requisite for filing
derivative suits under Rule 8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal right:

SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting the
rights of any stockholders or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially
all of the corporate property and assets as provided in this Code; and

3. In case of merger or consolidation.

Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if he or she voted against
the proposed corporate action and if he made a written demand for payment on the corporation within thirty
(30) days after the date of voting.

Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his letter informing themthat
Villamor should be made to deliver to PPC and accountfor MC Home Depot’s checks or their equivalent value. He
alleged that these are devices or schemes amounting to fraud or misrepresentation detrimental to the
corporation’s and the stockholders’ interests. He also alleged that the directors’ inaction placed PPC’s assets in
imminent and/or actual dissipation, loss, wastage, and destruction.
Page 174 of 343
Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors already comprised
all the available remedies that he could have exhausted and (b) the corporation was under full control of
petitioners that exhaustion of remedies became impossible or futile, 74 respondent Balmores failed toallege that
appraisal rights were not available for the acts complained of here.

Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on behalf
of the corporation.

The non-derivative character of respondent Balmores’ action may also be gleaned from his allegations in the trial
court complaint. In the complaint, he described the nature ofhis action as an action under Rule 1, Section 1(a)(1) of
the Interim Rules, and not an action under Rule 1, Section 1(a)(4) of the Interim Rules, which refers to derivative
suits. Thus, respondent Balmores said:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of directors,
business associates and officers of Pasig Printing Corporation (PPC), amounting to fraud or misrepresentation,
which are detrimental to the interest of the plaintiff as stockholder of PPC. 75 (Emphasis supplied)

Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers, amounting to fraud
or misrepresentation, which may be detrimental to the interest of the stockholders. This is different from a
derivative suit.

While devices and schemes of the board of directors, business associates, or officers amounting to fraud under
Rule 1, Section 1(a)(1) of the Interim Rules are causes of a derivative suit, it is not always the case that derivative
suits are limited to such causes or that they are necessarily derivative suits. Hence, they are separately
enumerated in Rule 1, Section 1(a) of the Interim Rules:

SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be observed in civil cases involving the
following:

(1) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or
partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation, partnership, or association;

(2) Controversies arising out of intra-corporate, partnership, or association relations, between and among
stockholders, members, or associates; and between, any or all of them and the corporation, partnership,
or association of which they are stockholders, members, or associates, respectively;

(3) Controversies in the election orappointment of directors, trustees, officers, or managers

ofcorporations, partnerships, or associations;

(4) Derivative suits;and

(5) Inspection of corporate books. (Emphasis supplied)

Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers may also beindividual
suits or class suits.

Individual suits are filed when the cause of action belongs to the individual stockholder personally, and notto the
stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of dividends to a
stockholder.76 If the cause of action belongs to a group of stockholders, such as when the rights violated belong
to preferred stockholders, a class or representative suit may be filed to protect the stockholders in the group. 77

In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner of describing
the nature of his action:
Page 175 of 343
1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of directors,
business associates and officers of Pasig Printing Corporation (PPC),amounting to fraud or misrepresentation,
which are detrimental to the interest of the plaintiff as stockholder of PPC. 78

(Emphasis supplied)

His intent was also explicit from his prayer:

WHEREFORE, plaintiff respectfully prays that the Honorable Court –

....

2. After notice and due proceedings –

Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain custody of the MC Home
checks and encash them upon maturity, as well as their refusal or failure to take any action against defendant
VILLAMOR to make him account and deliver the MC Home checks and/or their proceeds to Pasig Printing
Corporation are devices, schemes or acts amounting to fraud that are detrimental to plaintiff’s interest as a
stockholder of PPC;79 (Emphasis supplied)

Respondent Balmores did not bring the action for the benefit of the corporation. Instead, hewas alleging that the
acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm and their failure to take back
the MC Home Depot checks from Villamor, were detrimental to his individual interest as a stockholder. In filing an
action, therefore, his intention was to vindicate his individual interest and not PPC’s or a group of stockholders’.

The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is because the cause of
action belongs, primarily, to the corporation. The stockholder who sues on behalf of a corporation is merely a
nominal party.

Respondent Balmores’ intent to file an individual suit removes it from the coverage of derivative suits.

III

Respondent Balmores has no cause of action that would

entitle him to the reliefs sought

Corporations have a personality that is separate and distinct from their stockholders and directors. A wrong tothe
corporation does not necessarily create an individual cause of action. "A cause of action is the act or omission by
which a party violates the right of another." 80 A cause of action must pertain to complainant if he or she is to be
entitled to the reliefs sought. Thus, in Cua v. Tan,81 this court emphasized:

. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of action belongs to the
corporation and not to the individual stockholder or member. Although in most every case of wrong to the
corporation, each stockholder is necessarily affected because the value of his interest therein would beimpaired,
this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of
separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of
creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each
individual stockholder.82

In this case, respondent Balmores did not allege any cause of action that is personal to him. His allegations are
limited to the facts that PPC’s directors waived their rights to rental income in favor of Villamor’s law firm without
consideration and that they failed to take action when Villamor refused to turn over the amounts to PPC. These

Page 176 of 343

are wrongsthat pertain to PPC. Therefore, the cause of action belongs to PPC — not to respondent Balmores or
any stockholders as individuals.

For this reason, respondent Balmoresis not entitled to the reliefs sought in the complaint. Only the corporation,
or arguably the stockholders as a group, is entitled to these reliefs, which should have been sought in a proper
derivative suit filed on behalf of the corporation.

PPC will not be bound by a decision granting the application for the appointment of a receiver or management
committee. Since it was not impleaded in the complaint, the courtsdid not acquire jurisdiction over it. On this
matter, it is an indispensable party, without which, no final determination can be had.

Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his action, as petitioners point
out. It is the fact that he alleged no cause of action that pertains personally to him that disqualifies him from the
reliefs he sought in his complaint.

On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores’ petition for
certiorari, reversing the trial court’s decision, and issuing a new order placing PPC under receivership and creating
an interim management committee.

IV

Appointment of a management committee was not proper

Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred in placing
PPC under receivership and in creating and appointing a management committee.

A corporation may be placed under receivership, or management committees may be created to

preserveproperties involved in a suit and to protect the rights of the parties under the control and supervision of
the court.83Management committees and receivers are appointed when the corporation is in imminent danger of
"(1) [d]issipation, loss, wastage or destruction of assets or other properties; and (2) [p]aralysation of its business
operations that may be prejudicial to the interest of the minority stockholders, parties-litigants, or the general
public."84

Applicants for the appointment of a receiver or management committee need to establish the confluence of
these two requisites.1âwphi1 This is because appointed receivers and management committees will immediately
take over the management of the corporation and will have the management powers specified in law. 85 This may
have a negative effect on the operations and affairs of the corporation with third parties, 86 as persons who are
more familiar with its operations are necessarily dislodged from their positions in favor of appointees who are
strangers to the corporation’s operations and affairs.

Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said:

. . . the creation and appointment of a management committee and a receiver is an extra ordinary and drastic
remedy to be exercised with care and caution; and only when the requirements under the Interim Rules are
shown. It is a drastic course for the benefit of the minority stockholders, the parties-litigants or the general public
are allowed only under pressing circumstances and, when there is inadequacy, ineffectual or exhaustion of legal
or other remedies . . . The powerof the court to continue a business of a corporation . . . must be exercised with
the greatest care and caution. There should be a full consideration ofall the attendant facts, including the interest
of all the parties concerned.88

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in Villamor’s
possession. Some of the checks may have already been encashed. This court takes judicial notice that the
goodwill money of ₱18,000,000.00 and the rental payments of ₱4,500,000.00 every month are not meager
amounts only to be waived without any consideration. It is, therefore, enough to constitute loss or dissipation of
assets under the Interim Rules.
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Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of PPC’s business
operations. Apparently, PPC was earning substantial amounts from its other sub-lessees. Respondent Balmores
did not prove otherwise. He, therefore, failed to show at least one of the requisites for appointment of a receiver
or management committee.

The Court of Appeals had no

jurisdiction to appoint the receiver or management

committee

The Court of Appeals has no power to appoint a receiver or management committee. The Regional Trial Court
has original and exclusive jurisdiction 89 to hear and decide intra-corporate controversies,90 including incidents of
such controversies.91 These incidents include applications for the appointment of receivers or management
committees.

"The receiver and members of the management committee . . . are considered officers of the court and shall be
under its control and supervision."92 They are required to report tothe court on the status of the corporation
within sixty (60) days from their appointment and every three (3) months after. 93

When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a pending
action in the trial court. No less than the Court of Appeals stated that it allowed respondent Balmores’ petition
under Rule 65 because the order or resolution in question was an interlocutory one. This means that jurisdiction
over the main case was still lodged with the trial court.

The court making the appointment controls and supervises the appointed receiver or management
committee.1âwphi1Thus, the Court of Appeals’ appointment of a management committee would result in an
absurd scenario wherein while the main case is still pending before the trial court, the receiver or management
committee reports to the Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2, 2006 and its
resolution dated May 29, 2006 are SET ASIDE.

SO ORDERED.

MARVIC M.V. F. LEONEN

Associate Justice

G.R. No. 174938 October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,

vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G.
LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a contract entered
into by the corporation they represent if there are allegations of bad faith or malice in their acts representing the
corporation.

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This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5, 2006 resolution.
The Court of Appeals affirmed the trial court's decision holding that petitioners, as director, should submit
themselves as parties tothe arbitration proceedings between BF Corporation and Shangri-La Properties, Inc.
(Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-Laand the
members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr.,
Maximo G. Licauco III, and Benjamin C. Ramos.1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into agreements
with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel parking structure along
EDSA.2

Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3However, by October 1991, Shangri-La started defaulting in payment.4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings
using its own funds and credit despite Shangri-La’s default.5 According to BF Corporation, ShangriLa
misrepresented that it had funds to pay for its obligations with BF Corporation, and the delay in payment was
simply a matter of delayed processing of BF Corporation’s progress billing statements. 6

BF Corporation eventually completed the construction of the buildings.7 Shangri-La allegedly took possession of
the buildings while still owing BF Corporation an outstanding balance. 8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to it. 9 It also
alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs. Therefore, they should be
held jointly and severally liable with Shangri-La for its obligations as well as for the damages that BF Corporation
incurred as a result of Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos
filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration,
in accordance with the arbitration clauseprovided in its contract, quoted in the motion as follows: 11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager
on his behalf and the Contractor, either during the progress or after the completion or abandonment of the
Works as to the construction of this Contract or as to any matter or thing of whatsoever nature arising there
under or inconnection therewith (including any matter or thing left by this Contract to the discretion of the
Project Manager or the withholding by the Project Manager of any certificate to which the Contractor may claim
to be entitled or the measurement and valuation mentioned in clause 30(5)(a) of these Conditions or the rights
and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner and the Contractor
hereby agree to exert all efforts to settle their differences or dispute amicably. Failing these efforts then such
dispute or difference shall be referred to arbitration in accordance with the rules and procedures of the Philippine
Arbitration Law.

xxx xxx xxx

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the Arbitrators shall be
a condition precedent to any right of legal action that either party may have against the other. . .
.12 (Underscoring in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend proceedings. 14
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On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory counter claim
against BF Corporation and crossclaim against Shangri-La.15 They alleged that they had resigned as members of
Shangri-La’s board of directors as of July 15, 1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its November 18,
1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a
petition for certiorari with the Court of Appeals.17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the submission of the
dispute to arbitration.18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari with this
court.19On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that the dispute be
submitted for arbitration.20

Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and Shangri-La
failed to agree as to the law that should govern the arbitration proceedings. 21 On October 27, 1998, the trial court
issued the order directing the parties to conduct the proceedings in accordance with Republic Act No. 876. 22

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both seeking to clarify
the term, "parties," and whether Shangri-La’s directors should be included in the arbitration proceedings and
served with separate demands for arbitration. 23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be excluded
from the arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all defendants
in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s directors were interested parties who
"must also be served with a demand for arbitration to give them the opportunity to ventilate their side of the
controversy, safeguard their interest and fend off their respective positions." 26 Petitioners’ motion for
reconsideration ofthis order was denied by the trial court on January 19, 2005. 27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of discretion in the
issuance of orders compelling them to submit to arbitration proceedings despite being third parties to the
contract between Shangri-La and BF Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for certiorari. The Court of
Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration proceedings. 30 According to the
Court of Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in representation of the
party to the contract pursuant to Art. 31 of the Corporation Code, and that as directors of the defendant
corporation, [they], in accordance with Art. 1217 of the Civil Code, stand to be benefited or injured by the result of
the arbitration proceedings, hence, being necessary parties, they must be joined in order to have complete
adjudication of the controversy. Consequently, if [they were] excluded as parties in the arbitration proceedings
and an arbitral award is rendered, holding [Shangri-La] and its board of directors jointly and solidarily liable to
private respondent BF Corporation, a problem will arise, i.e., whether petitioners will be bound bysuch arbitral
award, and this will prevent complete determination of the issues and resolution of the controversy. 31

The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . . would be
contrary to the policy against multiplicity of suits." 32

The dispositive portion of the Court of Appeals’ decision reads:

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WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January 19, 2005 of public
respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED.33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006 resolution. 34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals decision and
the October 5, 2006 Court of Appeals resolution. 35

The issue in this case is whether petitioners should be made parties to the arbitration proceedings, pursuant to
the arbitration clause provided in the contract between BF Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or obligations. 36 The corporation is
a separate being, and nothing justifies BF Corporation’s allegation that they are solidarily liable with Shangri-
La.37Neither did they bind themselves personally nor did they undertake to shoulder Shangri-La’s obligations
should it fail in its obligations.38 BF Corporation also failed to establish fraud or bad faith on their part. 39

Petitioners also argue that they are third parties to the contract between BF Corporation and Shangri-
La.40Provisions including arbitration stipulations should bind only the parties. 41 Based on our arbitration laws,
parties who are strangers to an agreement cannot be compelled to arbitrate. 42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in resolving their
disputes.43 Compelling them to submit to arbitration is against this purpose and may be tantamount to
stipulating for the parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo C.Ramos and
Benjamin C. Ramos.45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that Shangri-
La’sdirectors, being non-parties to the contract, should not be made personally liable for Shangri-La’s
acts.46 Since the contract was executed only by BF Corporation and Shangri-La, only they should be affected by
the contract’s stipulation.47 BF Corporation also failed to specifically allege the unlawful acts of the directors that
should make them solidarily liable with Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should undergo
arbitration "clearly contemplated the inclusion of the directors of the corporation[.]" 49 BF Corporation also argued
that while petitioners were not parties to the agreement, they were still impleaded under Section 31 of the
Corporation Code.50Section 31 makes directors solidarily liable for fraud, gross negligence, and bad
faith.51 Petitioners are not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code.52

BF Corporation further argued that because petitioners were impleaded for their solidary liability, they are
necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the arbitration proceedings
should also be done in the interest of justice. 54

In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral Tribunal had
already promulgated its decision on July 31, 2007. 55 The Arbitral Tribunal denied BF Corporation’s claims against
them.56Petitioners stated that "[they] were included by the Arbitral Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection thereto. . . ." 57 They also stated that "[their] unwilling participation in
the arbitration case was done ex abundante ad cautela, as manifested therein on several occasions." 58 Petitioners
informed the court that they already manifested with the trial court that "any action taken on [the Arbitral
Tribunal’s decision] should be without prejudice to the resolution of [this] case." 59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and Maximo G.
Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that they should not be held

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liable for Shangri-La’s default and made parties to the arbitration proceedings because only BF Corporation and
Shangri-La were parties to the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability under Section 31
of the Corporation Code. Shangri-La added that their exclusion from the arbitration proceedings will result in
multiplicity of suits, which "is not favored in this jurisdiction." 60 It pointed out that the case had already been
mooted by the termination of the arbitration proceedings, which petitioners actively participated in. 61 Moreover,
BF Corporation assailed only the correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-
La’s directors from liability.62

BF Corporation filed a counter-manifestation with motion to dismiss 63 in lieu of the required memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were already
dismissed with finality, and the claims against them were likewise dismissed with finality, they no longer have any
interest orpersonality in the arbitration case. Thus, there is no longer any need to resolve the present Petition,
which mainly questions the inclusion of petitioners in the arbitration proceedings." 64 The court’s decision in this
case will no longer have any effect on the issue of petitioners’ inclusion in the arbitration proceedings. 65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF Corporation, have
rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that principles may be
established for the guidance of the bench, bar, and the public. In De la Camara v. Hon. Enage, 66 this court
disregarded the fact that petitioner in that case already escaped from prison and ruled on the issue of excessive
bails:

While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, still, as set forth
at the opening of this opinion, the fact that this case is moot and academic should not preclude this Tribunal
from setting forth in language clear and unmistakable, the obligation of fidelity on the part of lower court judges
to the unequivocal command of the Constitution that excessive bail shall not be required. 67

This principle was repeated in subsequent cases when this court deemed it proper to clarify important matters for
guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in accordance with
Shangri-Laand BF Corporation’s agreement, in order to determine if the distinction between Shangri-La’s
personality and their personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation and settle
disputes amicably and more expeditiously by themselves and through their choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code, 69 which was approved as early as 1949. It
was later institutionalized by the approval of Republic Act No. 876, 70 which expressly authorized, made valid,
enforceable, and irrevocable parties’ decision to submit their controversies, including incidental issues, to
arbitration. This court recognized this policy in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.: 71

As a corollary to the question regarding the existence of an arbitration agreement, defendant raises the issue
that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said agreement is void
and without effect for it amounts to removing said dispute from the jurisdiction of the courts in which the parties
are domiciled or where the dispute occurred. It is true that there are authorities which hold that "a clause in a
contract providing that all matters in dispute between the parties shall be referred to arbitrators and to them
alone, is contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric Co. vs. Pasay
Transportation Co., 57 Phil., 600, 603), however, there are authorities which favor "the more intelligent view that
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arbitration, as an inexpensive, speedy and amicable method of settling disputes, and as a means of avoiding
litigation, should receive every encouragement from the courts which may be extended without contravening
sound public policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view when it
reproduced in the new Civil Code the provisions of the old Code on Arbitration. And only recently it approved
Republic Act No. 876 expressly authorizing arbitration of future disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are liberally
construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol Industrial Construction
Groups, Inc.,73 this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with mediation,
conciliation and negotiation — is encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the commercial kind. It is thus regarded as the
"wave of the future" in international civil and commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts
should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that covers
the asserted dispute, an order to arbitrate should be granted. Any doubt should be resolved in favor of
arbitration.74(Emphasis supplied)

A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations that would
render effective an arbitration clause was later expressed in Republic Act No. 9285: 75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party autonomy in
the resolution of disputes or the freedom of the party to make their own arrangements to resolve their disputes.
Towards this end, the State shall encourage and actively promote the use of Alternative Dispute Resolution (ADR)
as an important means to achieve speedy and impartial justice and declog court dockets. As such, the State shall
provide means for the use of ADR as an efficient tool and an alternative procedure for the resolution of
appropriate cases. Likewise, the State shall enlist active private sector participation in the settlement of disputes
through ADR. This Act shall be without prejudice to the adoption by the Supreme Court of any ADR system, such
as mediation, conciliation, arbitration, or any combination thereof as a means of achieving speedy and efficient
means of resolving cases pending before all courts in the Philippines which shall be governed by such rules as the
Supreme Court may approve from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the policy of the law
in favor of arbitration.Where action is commenced by or against multiple parties, one or more of whomare parties
who are bound by the arbitration agreement although the civil action may continue as to those who are not
bound by such arbitration agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for purposes ofavoiding
litigation and expediting resolution of the dispute, that interpretation shall be adopted. Petitioners’ main
argument arises from the separate personality given to juridical persons vis-à-vis their directors, officers,
stockholders, and agents. Since they did not sign the arbitration agreement in any capacity, they cannot be
forced to submit to the jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement.
Moreover, they had already resigned as directors of Shangri-Laat the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and distinct from
Shangri-La.

A corporation is an artificial entity created by fiction of law. 76 This means that while it is not a person, naturally,
the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a
personality that is distinct and separate from other persons including its stockholders, officers, directors,
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representatives,77 and other juridical entities. The law vests in corporations rights,powers, and attributes as if they
were natural persons with physical existence and capabilities to act on their own. 78 For instance, they have the
power to sue and enter into transactions or contracts. Section 36 of the Corporation Code enumerates some of a
corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the power and
capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities and bonds of other corporations, as the transaction
of the lawful business of the corporation may reasonably and necessarily require, subject to the
limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and

11. To exercise such other powers asmay be essential or necessary to carry out its purpose or purposes as
stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through
itsdirectors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts
without them.

A consequence of a corporation’s separate personality is that consent by a corporation through its

representatives is not consent of the representative, personally. Its obligations, incurred through official acts of its
representatives, are its own. A stockholder, director, or representative does not become a party to a contract just
because a corporation executed a contract through that stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the
corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the
corporation.

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Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their disputes. This court
recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation79 that an arbitration clause shall not apply
to persons who were neither parties to the contract nor assignees of previous parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds
the parties thereto, as well as their assigns and heirs. But only they. 80 (Citations omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of
that contract and is itself a contract. As a rule, contracts are respected as the law between the contracting parties
and produce effect as between them, their assigns and heirs. Clearly, only parties to the Agreement . . . are bound
by the Agreement and its arbitration clause as they are the only signatories thereto. 82 (Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co., Inc. 83 and Stanfilco
Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not personally bind himself or herself to an
arbitration agreement cannot be forced to participate in arbitration proceedings made pursuant to an agreement
entered into by the corporation. He or she is generally not considered a party to that agreement.

However, there are instances when the distinction between personalities of directors, officers,and representatives,
and of the corporation, are disregarded. We call this piercing the veil of corporate fiction.

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues."85 It is also warranted in alter ego cases "where a corporation is merely a
farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation."86

When corporate veil is pierced, the corporation and persons who are normally treated as distinct from the
corporation are treated as one person, such that when the corporation is adjudged liable, these persons, too,
become liable as if they were the corporation.

Among the persons who may be treatedas the corporation itself under certain circumstances are its directors and
officers. Section 31 of the Corporation Code provides the instances when directors, trustees, or officers may
become liable for corporate acts:

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

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

Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily liable with it
for all damages suffered by the corporation, its stockholders or members, and other persons in any of the
following cases:

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 a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate
act;

b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as
director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto"; 87

b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation"; 88 and

c) "When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action."89

When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the
duty of courts or tribunals to determine if these persons and the corporation should be treated as one. Without a
trial, courts and tribunals have no basis for determining whether the veil of corporate fiction should be pierced.
Courts or tribunals do not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between the corporation and the
persons representing it. The determination of these circumstances must be made by one tribunal or court in a
proceeding participated in by all parties involved, including current representatives of the corporation, and those
persons whose personalities are impliedly the sameas the corporation. This is because when the court or tribunal
finds that circumstances exist warranting the piercing of the corporate veil, the corporate representatives are
treated as the corporation itself and should be held liable for corporate acts. The corporation’s distinct personality
is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a business under the
collective name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice orbad
faith on their part in directing the affairs of the corporation, complainants are effectively alleging that the
directors and the corporation are not acting as separate entities. They are alleging that the acts or omissions by
the corporation that violated their rights are also the directors’ acts or omissions. 90 They are alleging that
contracts executed by the corporation are contracts executed by the directors. Complainants effectively pray that
the corporate veilbe pierced because the cause of action between the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the parties. 1âwphi1 Under
the Rules of Court, filing of multiple suits for a single cause of action is prohibited. Institution of more than one
suit for the same cause of action constitutes splitting the cause of action, which is a ground for the dismissal ofthe
others. Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a single cause
of action. (3a)

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the basis of the
same cause of action, the filing of one or a judgment upon the merits in any one is available as a ground for the
dismissal of the others. (4a)

It is because the personalities of petitioners and the corporation may later be found to be indistinct that we rule
that petitioners may be compelled to submit to arbitration.

Page 186 of 343

However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we are not
overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration principle that only parties to
an arbitration agreement may be compelled to submit to arbitration. In that case, this court recognizedthat
persons other than the main party may be compelled to submit to arbitration, e.g., assignees and heirs. Assignees
and heirs may be considered parties to an arbitration agreement entered into by their assignor because the
assignor’s rights and obligations are transferred to them upon assignment. In other words, the assignor’s rights
and obligations become their own rights and obligations. In the same way, the corporation’s obligations are
treated as the representative’s obligations when the corporate veil is pierced. Moreover, in Heirs of Augusto
Salas, this court affirmed its policy against multiplicity of suits and unnecessary delay. This court said that "to split
the proceeding into arbitration for some parties and trial for other parties would "result in multiplicity of suits,
duplicitous procedure and unnecessary delay." 91 This court also intimated that the interest of justice would be
best observed if it adjudicated rights in a single proceeding. 92 While the facts of that case prompted this court to
direct the trial court to proceed to determine the issues of thatcase, it did not prohibit courts from allowing the
case to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the incidental issue of
whether piercing of the corporate veil is warranted, should be determined in a single proceeding. Such finding
would determine if the corporation is merely an aggregation of persons whose liabilities must be treated as one
with the corporation.

However, when the courts disregard the corporation’s distinct and separate personality from its directors or
officers, the courts do not say that the corporation, in all instances and for all purposes, is the same as its
directors, stockholders, officers, and agents. It does not result in an absolute confusion of personalities of the
corporation and the persons composing or representing it. Courts merely discount the distinction and treat them
as one, in relation to a specific act, in order to extend the terms of the contract and the liabilities for all damages
to erring corporate officials who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the corporate veil,
parties who are normally treated as distinct individuals should be made to participate in the arbitration
proceedings in order to determine ifsuch distinction should indeed be disregarded and, if so, to determine the
extent of their liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the existence of
circumstances that render petitioners and the other directors solidarily liable. It ruled that petitioners and
Shangri-La’s other directors were not liable for the contractual obligations of Shangri-La to BF Corporation. The
Arbitral Tribunal’s decision was made with the participation of petitioners, albeit with their continuing objection.
In view of our discussion above, we rule that petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and resolution of October 5,
2006 are AFFIRMED.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice

G.R. No. 164686, October 22, 2014

FOREST HILLS GOLF AND COUNTRY CLUB, INC., Petitioner, v. GARDPRO, INC., Respondent.

DECISION

BERSAMIN, J.:

Page 187 of 343

The articles of incorporation and the by-laws of a corporation define and regulate the relations between the
corporation and the stockholders. In interpreting them, the literal meaning of their provisions shall control, and
such provisions should be construed as a whole and not in isolation.

The Case

This appeal by the corporation seeks to overturn the ruling promulgated on September 26, 2003 by the Court of
Appeals (CA) denying its appeal by petition for review, thereby affirming the adverse ruling of the Securities and
Exchange Commission (SEC) regarding the refund of membership fees. 1

Antecedents

Petitioner Forest Hills Golf and Country Club, Inc. (interchangeably Forest Hills or Club), a non-profit stock
corporation, was established to promote social, recreational and athletic activities among its members. It
constructed and maintained golf courses, tennis courts, swimming pools, and other indoor and outdoor sports
and recreational facilities. It was an exclusive and private club organized for the sole benefit of its members. In
March 1993, Fil-Estate Properties, Inc., a party to a Project Agreement to develop the Forest Hills Residential
Estates and the Forest Hills Golf and Country Club, undertook to market the golf club shares of Forest Hills for a
fee. In July 1995, Fil-Estate Properties, Inc. (FEPI) assigned its rights and obligations under the Project Agreement
to Fil- Estate Golf and Development, Inc. (FEGDI).2

In 1995, FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc., (FEMAI) to market and offer for sale the
shares of stocks of Forest Hills. Leandro de Mesa, the President of FEMAI, oriented the sales staff on the
information that would usually be inquired about by prospective buyers. He made it clear that membership in the
Club was a privilege, such that purchasers of shares of stock would not automatically become members of the
Club, but must apply for and comply with all the requirements in order to qualify them for membership, subject
to the approval of the Board of Directors. 3

In 1996, Gardpro, Inc. (Gardpro) bought class “C” common shares of stock, which were special corporate shares
that entitled the registered owner to designate two nominees or representatives for membership in the Club. 4

In October 1997, Ramon Albert, the General Manager of the Club, notified the shareholders that it was already
accepting applications for membership. In that regard, Gardpro designated Fernando R. Martin and Rolando N.
Reyes to be its corporate nominees; hence, the two applied for membership in the Club. Forest Hills charged
them membership fees of P50,000.00 each, prompting Martin to immediately call up Albert and complain about
being thus charged despite having been assured that no such fees would be collected from them. With Albert
assuring that the fees were temporary,5 both nominees of Gardpro paid the fees. At that time, the P45,000.00
membership fees of corporate members were increased to P75,000.00 per nominee by virtue of the August 26,
1997 resolution of the Board of Directors. Any nominee who paid the fees within a specified period was entitled
to a discount of P25,000.00. Both nominees of Gardpro were then admitted as members upon approval of their
applications by the Board of Directors. Later, Gardpro decided to change its designated nominees, and Forest
Hills charged Gardpro new membership fees of P75,000.00 per nominee. When Gardpro refused to pay, the
replacement did not take place.

On July 7, 1999, Gardpro filed a complaint in the SEC, 6 which Forest Hills duly answered.7 Martin and Reyes
testified that when the shares of stock were being marketed, nothing about payment of membership fees was
explained to them; that upon his inquiry, a certain Ms. Cacho, an agent of FEMAI, had told Martin that if a
corporation bought class “C” common shares, its nominees would be automatically entitled to become members
of the Club; that all that the corporation would have to do thereafter was to pay the monthly dues; 8 that Albert
had assured Martin that the membership fees he had paid would be refunded; and that Martin was not furnished
copies of the by-laws of Forest Hills.

On June 30, 2000, SEC Hearing Officer Natividad T. Querijero rendered her decision, disposing as follows: 9

WHEREFORE, judgment is hereby rendered (1) restraining defendant from collecting membership fees for the two
(2) replacement members;(2) the membership fees already paid shall be applied as membership fees for the two
Page 188 of 343
(2) replacement members; and (3) to pay complainant attorney’s fees in the amount of Fifty Thousand
(P50,000.00) Pesos.

SO ORDERED.

Judgment of the SEC En Banc

On June 28, 2001, the SEC En Banc affirmed the findings of Hearing Officer Querijero, except the granting of
attorney’s fees to Gardpro,10viz:

The main issue to be resolved in this appeal, therefore, is whether or not under the by-laws of the club, it is
authorized to collect new membership fees for replacement nominees of Class “C” members. Nowhere in the by-
laws of respondent-appellant is there a provision that authorizes the collection of membership fees every time a
nominee of corporate shareholder is to be replaced. What the by-laws authorizes is the collection of a “transfer
fee,” in such amount as may be prescribed by the Board, for every change in the designated nominees of a
juridical entity (Art. II, Sec. 2.2 Subsection 2.2.2). This should be differentiated from the provision of Art. III, Sec.
13.6 of the By-laws, which authorizes the collection of “transfer fee” of P60,000 for corporate members for each
transfer of stock in the club's books. The transfer fee under the former provision refers to the one imposed on the
change in the corporate member's designated nominee only while the transfer fee under the latter provision
refers to the a transfer of the stock itself from one corporate member to another which necessitates entry in the
club's books. As correctly pointed out in the appealed decision, the corporation is the real club member
(corporate) although its designated representative can also be a regular member of the Club. Therefore, it should
not be assessed membership fees everytime it changes its nominees but only transfer fees as earlier pointed out.
While we agree with respondent-appellant that any replacement of a nominee of a corporate
shareholder/member must apply for membership and qualify, the By-laws does not require another payment for
membership fee.11

Decision of the CA

On October 10, 2001, Forest Hills appealed to the CA, 12 which ultimately promulgated its assailed decision on
September 26, 2003, denying the petition for review, and affirming the ruling of the SEC, 13viz:

x x x What is at issue is the interpretation of a By-law provision regarding membership in the Club.

The procedure for acquiring membership is outlined in the provisions of the By-laws, where the end result is the
approval of the Board of Directors of the application for membership submitted both by the juridical entity
holding shares in the Club, and the designated nominee or representative.

Contrary to the claim of the petitioner, the payment of membership fee is not a part of the procedure for the
approval of the application for membership. The matter of membership fees is provided under section 13.7 of the
By-Laws, and reads as follows:

Section 13.7 MEMBERSHIP FEES. Unless otherwise determined by the Board of Directors, a membership fee of
Thirty Thousand Pesos (P30,000.00) for individual and Forty Five Thousand Pesos (45,000.00) for corporate
members must be paid the applicant within 30 days from the approval of his application before his share can be
register[ed] in the Stock and Transfer Books of the Club as provided in Section 2.2.6 of these By-laws. Non-
payment of the membership fee within the 30 day period shall be deemed a withdrawal of the application. These
amount maybe waived, increased or decreased from time to time by a resolution of the Board of Directors.
(Emphasis supplied)

From the foregoing, it is clear that the membership is required to be paid within 30 days from approval of the
application, and is for the purpose of registering the share of the aspiring member in the Stock and Transfer
books of the Club.

We agree with the ruling of the SEC and the Hearing Officer that the real club member is Gardpro, and not its
designated nominees/ representatives, considering the following:
Page 189 of 343
 1. The corporation (Gardpro) owns the Class “C” share as the by-laws itself provides, the nominees are
merely nominees or representatives of the corporation, the latter being the real member. (Section 2.2.2,
Section 2.2.4)

2. A regular individual member is entitled to vote; however, in the case of a regular corporate member, only
one of the nominees may vote for the corporation they represent. (Section 2.2.2)

3. The corporation, besides the nominees, has to submit its application for membership and has to be
screened vis-à-vis the nominees. [Section 2.2.7 par (d)]

4. The corporation is primarily liable for the obligations of the nominees. (Section 13.1)

5. The nature of membership of nominees may rightfully (be) compared to that of an assignee- member.
(Section 2.2.8)

When respondent Gardpro decided to replace its designated nominees, it should not be required to pay
membership fees again as it has already paid such fees for the original designated nominees. As the real Club
members, respondent should not be assessed membership fees every time it changes its nominees. Nowhere in
the By-Laws of the petitioner is it provided that it is authorized to collect membership fees every time a nominee
of a corporate shareholder is to be replaced.

As correctly held by the Hearing Officer and the SEC, the applicable provision on the matter is section 2.2.2 of the
By-Laws, the relevant portion of which states:

“A juridical entity owning a Class “C” Common Share may, by resolution of its board of directors or trustees,
designate two (2) nominees for regular membership to the club for each Class “C” Share registered in its name;
provided, however, that only one (1) nominee for each Class “C” Share, as designated in the aforesaid resolution
may vote and hold office as such. The said nominee(s) or representative(s), upon approval of the Board of
Directors, may be admitted as Regular Member(s). A transfer fee in such amount as may be prescribed by the
Board of Directors, shall be charged for every change in the designated nominee of juridical entity.” (Emphasis
supplied)

If at all, respondent Gardpro should only be made to pay the transfer fee mentioned in the aforequoted
provision. It should, however, be noted that said transfer fee is different from that provided in section 13.6 of the
By-laws, which authorizes the collection of ‘transfer fee’ of P60,000.00 for corporate members for each transfer of
stock in the Club's Books. In this case, there is no transfer of share of ownership to be effected in the Book of the
Club. As aptly ruled by the SEC, the transfer fee under the former provision refers to the one imposed on the
change in the corporate member's designated nominee only, while the transfer fee under the latter provision
refers to a transfer of the stock itself from one corporate member to another which necessitates entry in the
Club's Books.

Petitioner’s contention that section 2.2.2 is inapplicable because the former nominees had already qualified and
were accepted is likewise untenable. It is clear from the provision that the transfer fee is imposable “for every
change in the designated nominee of the juridical entity, making no distinction between a nominee who has
already qualified and was already accepted and one who is yet to qualify or be accepted. Petitioner contends that
had the change occurred before the nominees became members, then section 2.2.2 may apply, and only a
transfer fee is chargeable. This, We hold, is hair splitting. By becoming members through the favorable action of
the Board of Directors on the (sic) their application for membership, the former nominees did not cease to be
the “designated nominees” of the respondent. Therefore, the matter of replacing the designated nominees of the
respondent falls squarely under the provision of section 2.2.2, such that only a transfer fee is required to be paid.
However, We agree with the petitioner that any replacement of a nominee of a corporate shareholder/member
must apply for membership and qualify.

WHEREFORE, premises considered, the instant petition is hereby DENIED. The Order of the Securities and
Exchange Commission, dated June 28, 2001, is AFFIRMED in toto.
Page 190 of 343
SO ORDERED.14

Forest Hills moved to reconsider the decision on October 17, 2003.

On November 28, 2003, the Federation of Golf Clubs (Phil.), Inc. (Federation) sought leave to intervene as amicus
curiae,15 but the CA denied the motion to intervene on March 1, 2004 because it doubted the Federation’s
impartiality due to Forest Hills being one of its members; and because the issues did not concern matters of
broad public interest to make it necessary to invite amicus curiae.16

On July 27, 2004, the CA denied the motion for reconsideration of Forest Hills.17

Issues

On September 17, 2004, Forest Hills tendered the following issues in its petition for review on certiorari, to wit:

I.

The Court of Appeals committed an error of law in not holding that, under the applicable provisions of law on the
interpretation of contracts, the replacement nominees of Gardpro, Inc., who were applying for membership in
Forest Hills, should pay the required membership fees.

II.

The Court of Appeals committed an error of law in encroaching upon the prerogative of Forest Hills to determine
its own rules and procedure governing membership as well as in infringing on the power of its Board of Directors
to decide upon all questions on the construction of Articles of Incorporation, By-Laws and rules and regulations
of the Club.

III.

The Court of Appeals committed an error of law in not allowing the intervention of the Federation of Golf Club of
the Philippines, Inc. as amicus curiae.18

Ruling of the Court

The appeal lacks merit. The CA did not err in rendering its assailed decision against the petitioner.

1.
Replacement nominees of Gardpro
were not required to pay membership fees

Forest Hills was not authorized under its articles of incorporation and by-laws to collect new membership fees for
the replacement nominees of Gardpro.

There is no question that Gardpro held class “C” common stocks that entitled it to two memberships in the Club.
Its nominees could be admitted as regular members upon approval of the Board of Directors but only one
nominee for each class “C” share as designated in the resolution could vote as such. A regular member was then
entitled to use all the facilities and privileges of the Club. In that regard, Gardpro could only designate as its
nominees/representatives its officers whose functions and office were defined by its own by-laws.

The membership in the Club was a privilege, it being clear that the mere purchase of a share in the Club did not
immediately qualify a juridical entity for membership. Admission for membership was still upon the favorable
action of the Board of Directors of the Club. Under Section 2.2.7 of its by-laws, the application form was
accomplished by the chairman of the board, president or chief executive officer of the applicant juridical entity.
The designated nominees also accomplished their respective application forms, duly proposed and seconded,
Page 191 of 343
and the nominees were evaluated as to their qualifications. The nominees automatically became ineligible for
membership once they ceased to be officers of the corporate member under its by-laws upon certification of
such loss of tenure by a responsible officer of the corporate member.

Under Section 2.2.6 of the Club’s by-laws, membership fees of P45,000.00 must be paid by the applicant within
30 days from the approval of the application before the share could be registered in the Stock and Transfer
Books of the Club. Non-payment of the membership fees within the 30-day period would be deemed a
withdrawal of the application. The amount of the fees could be waived, increased or decreased by the Board of
Directors. Pursuant to the Club’s articles of incorporation and by-laws, the membership fees should be paid by
the corporate member. Based on the procedure set forth in Section 2.2.7 of the by-laws, the applicant was the
juridical entity, not its nominee or nominees. Although the nominee or nominees also accomplished their
application forms for membership in the Club, it was the corporate member that was obliged to pay the
membership fees in its own capacity because the share was registered in its name in the Stock and Transfer Book.

Corporations buy shares in clubs in order to invest for earnings. Their purchases may also be to reward their
corporate executives by having them enjoy the facilities and perks concomitant to the club memberships. When
Gardpro purchased and registered its ownership of the class “C” common shares, it did not only invest for
earnings because it also became entitled to nominate two of its officers in the Club as set forth in its seventh
purpose of the articles of incorporation and Section 2.2.2 of the by-laws, to wit:

Articles of Incorporation

xxxx

SEVENTH

xxxx

That this Corporation is an exclusive club and is organized on a non-profit basis for the sole benefit of its
member/members. Ownership of a share shall entitle the registered owner to the use of all the sports and other
facilities of the club, but subject to the terms and conditions herein prescribed, to the By-laws of the corporation,
and to the policies, rules and regulations as may from time to time be promulgated by the Board of Directors.
(Bold emphasis supplied)19

By-Laws

xxxx

2.2.2 Subject to compliance with rules and regulations, a Regular Member is entitled to use all the facilities and
privileges of the Club. x x x (Bold emphasis supplied)20

Entitle is a term that means to give a right, claim or legal title to. 21 And, as far as the courts have dealt with the
term, it may be gathered that entitle signifies the granting of a privilege or right to be exercised at the option of
the party for whose benefit the term is used upon which no limitation can be arbitrarily imposed. 22 Nonetheless,
the use of the recreational facilities of the Club is commonly known as playing rights of the corporate member or
its nominees.

Golf clubs usually sell shares to individuals and juridical entities in order to raise capital for the construction of
their recreational facilities. In that regard, golf clubs accept juridical entities to become regular members, 23 and
allow such entities to designate corporate nominees because only natural persons can enjoy the sports facilities.
In the context of this arrangement, Gardpro’s two nominees held playing rights. But the articles of incorporation
of Forest Hills and Section 2.2.2 of its by-laws recognized the right of the corporate member to replace the
nominees, subject to the payment of the transfer fee in such amount as the Board of Directors determined for
every change. The replacement could take place for any of the following reasons, namely: (a) if the nominee
should cease to be an officer of the corporate member; 24 or (b) if the corporate member should request the

Page 192 of 343

replacement. In case of a replacement, the playing rights would also be transferred to the new nominees.

According to the second paragraph of Section 13.6 of the by-laws, the transfer of playing rights entailed the
payment of P10,000.00. Yet, Section 2.2.2 of the by-laws stipulated a transfer fee for every replacement. This
warranted the conclusion that Gardpro should pay to Forest Hills the transfer fee of P10,000.00 because it desired
to change its nominees.

There was an inconsistency between the by-laws of Forest Hills and the affidavit of Albert as to the amounts of
the membership fees of corporate members. On one hand, Section 13.7 (Membership Fees) of the by-laws stated
that “the membership fee of Forty Five Thousand Pesos (P45,000.00) x x x for corporate members must be paid
by the applicant;” on the other, Albert’s affidavit alleged that “each nominee shall pay the P75,000.00
membership fee.” To resolve the inconsistency, the by-laws should prevail because they constituted the private
statutes of the corporation and its members and must be strictly complied with and applied to the letter.

Martin attested that he and Reyes, as the nominees of Gardpro, paid P50,000.00 each as membership fees. 25 With
the payment of the fees being the personal obligation of Gardpro, the Court leaves the matter to the internal
determination of Gardpro and its nominees.

The relevant provisions of the articles of incorporation and the by-laws of Forest Hills governed the relations of
the parties as far as the issues between them were concerned. Indeed, the articles of incorporation of Forest Hills
defined its charter as a corporation and the contractual relationships between Forest Hills and the State, between
its stockholders and the State, and between Forest Hills and its stockholder; hence, there could be no gainsaying
that the contents of the articles of incorporation were binding not only on Forest Hills but also on its
shareholders.26 On the other hand, the by-laws were the self-imposed rules resulting from the agreement
between Forest Hills and its members to conduct the corporate business in a particular way. In that sense, the by-
laws were the private “statutes” by which Forest Hills was regulated, and would function. The charter and the by-
laws were thus the fundamental documents governing the conduct of Forest Hills’ corporate affairs; they
established norms of procedure for exercising rights, and reflected the purposes and intentions of the
incorporators. Until repealed, the by-laws were a continuing rule for the government of Forest Hills and its
officers, the proper function being to regulate the transaction of the incidental business of Forest Hills. The by-
laws constituted a binding contract as between Forest Hills and its members, and as between the members
themselves. Every stockholder governed by the by-laws was entitled to access them.27 The by-laws were self-
imposed private laws binding on all members, directors and officers of Forest Hills. The prevailing rule is that the
provisions of the articles of incorporation and the by-laws must be strictly complied with and applied to the
letter.28

In construing and applying the provisions of the articles of incorporation and the by-laws of Forest Hills, the CA
has leaned on the plain meaning rule embodied in Article 1370 of the Civil Code, to the effect that if the terms of
the contract are clear and leave no doubt upon the intention of

the contracting parties, the literal meaning of its stipulations shall control. The application of the rule has been
fittingly explained as follows:

Our ruling in Benguet Corporation, et al. v. Cesar Cabildo is instructive:chanroblesvirtuallawlibrary

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the Civil
Code: “[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.” This provision is akin to the “plain meaning rule” applied by
Pennsylvania courts, which assumes that the intent of the parties to an instrument is “embodied in the writing
itself, and when the words are clear and unambiguous the intent is to be discovered only from the express
language of the agreement.” It also resembles the “four corners” rule, a principle which allows courts in some
cases to search beneath the semantic surface for clues to meaning. A court’s purpose in examining a contract is
to interpret the intent of the contracting parties, as objectively manifested by them. The process of interpreting a
contract requires the court to make a preliminary inquiry as to whether the contract before it is ambiguous. A
contract provision is ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written
terms of the contract are not ambiguous and can only be read one way, the court will interpret the contract as a

Page 193 of 343

matter of law. If the contract is determined to be ambiguous, then the interpretation of the contract is left to the
court, to resolve the ambiguity in the light of the intrinsic evidence.

In our jurisdiction, the rule is thoroughly discussed in Bautista v. Court of Appeals:chanroblesvirtuallawlibrary

The rule is that where the language of a contract is plain and unambiguous, its meaning should be determined
without reference to extrinsic facts or aids. The intention of the parties must be gathered from that language, and
from that language alone. Stated differently, where the language of a written contract is clear and unambiguous,
the contract must be taken to mean that which, on its face, it purports to mean, unless some good reason can be
assigned to show that the words should be understood in a different sense. Courts cannot make for the parties
better or more equitable agreements than they themselves have been satisfied to make, or rewrite contracts
because they operate harshly or inequitably as to one of the parties, or alter them for the benefit of one party
and to the detriment of the other, or by construction, relieve one of the parties from the terms which he
voluntarily consented to, or impose on him those which he did not. 29

The CA was also guided by Article 1374 of the Civil Code, which declares that “[t]he various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of
them taken jointly.” Verily, all stipulations of the contract are considered and the whole agreement is rendered
valid and enforceable, instead of treating some provisions as superfluous, void, or inoperable.

2.
The CA did not encroach upon the prerogative
of Forest Hills to determine its own rules and procedures
and to decide all questions on the construction of
its articles of incorporation and by-laws

Anent the second issue, the Court disagrees with the contention of Forest Hills that the CA encroached upon its
prerogative to determine its own rules and procedures and to decide all issues on the construction of its articles
of incorporation and by-laws. On the contrary, the CA acted entirely within its legal competence to decide the
issues between the parties.

The complaint of Gardpro stated a cause of action, and thus contained the operative acts that gave rise to its
remedial right against Forest Hills.30 The cause of action required not only the interpretation of contracts and the
application of corporate laws but also the application of the civil law itself, particularly its tenets on unjust
enrichment31 and those regulating property rights arising from ownership. If Forest Hills were allowed to charge
nominees membership fees, and then to still charge their replacement nominees every time a corporate member
changed its nominees, Gardpro would be unduly deprived of its full enjoyment and control of its property even
as the former would be unjustly enriched.

The interpretation and application of laws have been assigned to the Judiciary under our system of constitutional
government. Indeed, defining and interpreting the laws are truly a judicial function. 32Hence, the CA could not be
denied the authority to interpret the provisions of the articles of incorporation and by-laws of Forest Hills,
because such provisions, albeit in the nature of private laws, impacted on the definition of the rights and
obligations of the parties. This, notwithstanding that Section 16.4 of the by-laws gave to the Board of Directors of
Forest Hills the authority to decide all questions on the construction of its articles of incorporation and by-laws,
and its rules and regulations.

3.
Intervention of the Federation of Golf Clubs
of the Philippines, Inc. as amicus curiae was not necessary

The CA properly disallowed the intervention of the Federation of Golf Clubs of the Philippines, Inc. as amicus
curiae.

The courts may invite experienced and impartial attorneys to appear as amici curiae to help in the disposition of
issues submitted to them.33 As such, the appearance of amicus curiae, whether by invitation or by leave, has
always been a matter of favor or grace, not of right or privilege. There is no right to compel the courts to
Page 194 of 343
permit amici curiae to appear. This simply means that the intervention of amicus curiae lies in the discretion of
the courts, which may grant or refuse leave, according as they deem the proffered information timely and useful,
or otherwise. Where matters of public concern are involved, the courts exercise great liberality in granting leave
to appear; but where the parties are assisted by competent counsel, leave to appear as amici curiae has been
usually withheld. In general, the courts desist from allowing the intervention as amicus curiae of anyone whose
attitude appears to be partisan (such as a person in the service of those having private interests in the outcome
of the litigation).34

The membership of Federation of Golf Clubs of the Philippines Inc. included Forest Hills and other similarly
situated golf clubs. Hence, its partisanship or partiality on the pending issues was beyond question. Its
participation in the action would not advance the objective appreciation by the CA of such issues. In any event,
the action herein involved the contract between parties, and was a private matter fully within the competence of
the SEC and the CA to consider and resolve. It is notable that Forest Hills was adequately represented by capable
counsel.

WHEREFORE, the Court AFFIRMS the decision promulgated on September 26, 2003; and ORDERS the petitioner to
pay the costs of suit.

SO ORDERED.

Sereno, C.J., Leonardo-De Castro, Perez, and Perlas-Bernabe, JJ., concur.

G.R. No. 154291 November 12, 2014

LOPEZ REALTY, INC. and ASUNCION LOPEZ-GONZALES, Petitioners,

vs.
SPOUSES REYNALDO TANJANGCO and MARIA LUISA ARGUELLES-TANJANGCO, Respondents.

DECISION

REYES, J.:

This is a Petition for Review1 under Rule 45 of the Rules of Court from the Decision 2 dated February 22, 2002 of
the Court of Appeals (CA) in CA-G.R. CV No. 63519 which reversed and set aside the Decision 3 dated June 25,
1997 of the Regional Trial Court (RTC) of Manila, Branch 25, in Civil Case No. 144667.

Antecedents Facts

Lopez Realty, Inc. (LRI) and Dr. Jose Tanjangco (Jose) were the registered co-owners of three parcels of land and
the building erected thereon known as the "Trade Center Building", which were covered by Transfer Certificates
of Title (TCT) Nos. 127778, 127779 and 127780 (subject properties) of the Register ofDeeds of Manila. Jose’s one-
half share in the subject properties were later transferred and registered in the name of his son Reynaldo
Tanjangco and daughter-in-law, Maria Luisa Arguelles (spouses Tanjangco).

At the time material to this case,the stockholders of record of LRI were the following:

a. Asuncion Lopez-Gonzalez (Asuncion) – 7,831 shares;

b. Arturo F. Lopez (Arturo) – 7,830 shares;

c. Teresita Lopez-Marquez (Teresita) – 7,830 shares;

d. Rosendo de Leon (Rosendo) – 5 shares

e. Benjamin Bernardino (Benjamin) – 1 share;

Page 195 of 343
 f. Augusto de Leon (Augusto) – 1 share; and

g. Leo Rivera (Leo) – 1 share4

Except for Arturo and Teresita, the rest of the stockholders were members of the Board of Directors.5 Asuncion
was LRI’s Corporate Secretary.

In a special meeting of the stockholders held on July 27, 1981, the sale of the one-half share of LRI in the Trade
Center Building was discussed:

MINUTES OF SPECIAL MEETING OF STOCKHOLDERS OF LOPEZ REALTY[,] INCORPORATED ON JULY 27, 1981 AT
3:00 P.M.

STOCKHOLDERS PRESENT:

TERESITA L. MARQUEZ - 7,830 shares

ASUNCION F. LOPEZ - 7,831 shares

ARTURO F. LOPEZ - 7,830 shares

ROSENDO DE LEON - 5 share[s]

BENJAMIN B. BERNARDINO - 1 share

LEO R. RIVERA - 1 share

TOTAL 23,498 Shares

II. Sale of One-Half (1/2) Share of Lopez Realty, Inc. in Trade Center Building

The matter of the sale of ½ share of Lopez Realty, Inc., in the Trade Center Building was taken up. Atty. Benjamin
B. Bernardino informed the body that the selling price is pegged at 4 Million Pesos, and the Tanjangcos are
offering 3.6 Million Pesos plus 50% of the receivablesor a total of 3.8 Million Pesos payable under the following
terms:

1) 50% - upon registration 50% - 30 days thereafter

2) All expenses and documentary stamp tax to be born[e] by the Tanjangcos.

3) Transfer Tax and Reserve Fund to be borne by Lopez Realty, Inc.

ASUNCION F. LOPEZ countered for a selling price of 5 Million Pesos, LOPEZ REALTY, INC., clean and of
everything. At this point, TERESITA L. MARQUEZ and BENJAMIN B. BERNARDINO offered to ASUNCION F. LOPEZ
that they (she) accept (equal) the TANJANGCO’s offer as stated above. At this juncture, ASUNCION F. LOPEZ x x x
called and talked with TANJANGCO over the phone three (3) times and offered the selling price at 5 Million Pesos
but the latter did not move from their original offer as above-stated.

It was finally agreed by the body that ASUNCION F. LOPEZ x x x be given the priority to accept [equal] the
TANJANGCO offer and the same to be exercised within ten (10 accept) days. Failure on her part to act on the
offer, the said offer will be deemed accepted. 6 (Emphasis in the original)

On July 28, 1981, Teresita died.7

Page 196 of 343

Asuncion failed to exercise her option to purchase the subject properties within the stated period. Thus, on
August 17, 1981, while Asuncion was abroad, the remaining directors: Rosendo, Benjamin and Leo convened in a
special meeting, where the following resolution was passed and approved: 8

III. Upon motion duly seconded, Mr. ARTURO F. LOPEZ had been authorized by the Board to immediately
negotiate with the Tanjangcos on the matter of the latter’s offer to purchase ½ of the Trade Center Building and
in connection there with he is given full power and authority by the Boardto carry out the complete termination
of the sale terms and conditions as embodied in the Resolution of July 27, 1981 and in connection therewith is
likewise authorized to sign for and in behalf of Lopez Realty Incorporated.

RESOLUTION
Series of 1981

RESOLVED, as it is hereby resolved that ARTURO F. LOPEZ negotiate with the Tanjangcos on the matter of the
sale of 1/2 of Trade Center Bldg., in accordance with the terms and conditions embodied in the Minutes of the
Special Meeting of July 27, 1981.9 (Emphasis in the original) On August 25, 1981, on the strength ofthe foregoing
board resolution, Arturo executed a Deed of Sale selling LRI’s one-half interest in the subject properties to Jose,
who was represented by his son, Manuel Tanjangco (Manuel). The price was fixed at ₱3,600,000.00, payable in
the following manner: 50% or ₱1,800,000.00 upon registration of the Deed of Sale and the other 50% within 30
days from such registration.10

Upon learning of the above developments, Asuncion sent cablegrams to Rosendo and Jose on August 25,
1981,requesting them not to proceed with the sale. 11 Consequently, on September 1, 1981, the Board had a special
meeting where the following resolution was passed and approved:

RESOLUTION
Series of 1981

"In view of the cable of Ms. Asuncion Lopez, the [B]oard decided to postpone [the] final action on the sale of
Lopez Realty, Inc. share in Trade Center Building to the Tanjangcosso that she can be enlightened on all
proceedings of the Board during her absence.

UNANIMOUSLY APPROVED."12

Upon Asuncion’s arrival, the Board had a meeting on September 16, 1981, where she moved for the repeal and/or
amendment of the August 17, 1981 and August 24, 1981 Board Resolutions. While Benjamin opposed Asuncion’s
motion, the members of the Board agreed to defer action on the matter until such time when Arturo and
Asuncion have conferred or settled the matter. 13

As Jose’s one-half interest in the subject properties had already been transferred to the spouses Tanjangco,it was
requested that LRI execute another deed of sale, where the spouses Tanjangco shall be designated as buyers.
Thus, on October 5, 1981, Arturoexecuted a Deed ofSale similar to that which was executed on August 25,1981 in
favor of the spouses Tanjangco.14

The spouses Tanjangco paid LRI the amount of ₱1,800,000.00, which the latter accepted by issuing Official
Receipt No. 723.15 The spouses Tanjangco then registered the Deed of Sale with the Register of Deeds of Manila,
causing the cancellation of TCT Nos. 127778,127779 and 127780 and the issuance of TCT Nos. 145983, 145984 and
145985 in their name.16 Consequently, on November 4, 1981, LRI and Asuncion (herein petitioners) filed with the
then Court of First Instance of Manila, a Complaint 17 for annulment of sale, cancellation of title, reconveyance and
damages with prayer for the issuance of temporary restraining order (TRO) and/or writ of preliminary injunction
against the spouses Tanjangco, Arturo and the Registrar of Deeds of Manila. The complaint was docketed as Civil
Case No. 144667 and raffled to Branch 25.Essentially, it was alleged that the sale is not binding on LRI as the
August 17, 1981 Board Resolution, authorizing Arturo to sell the corporation’s one-half interest in the subject
properties, is invalid for lack of notice to Asuncion. It was also alleged that the said board resolution had already
been revoked by the Board of Directors in their September 1, 1981 and September 16, 1981 Resolutions.
Page 197 of 343
On November 11, 1981, the trial court issued a TRO, enjoining the spouses Tanjangco from paying the balance of
the purchase price and Arturo from accepting payment. 18

On November 13, 1981, Manuel, in representation of the spouses Tanjangco, wrote LRI, enclosing a manager’s
check for ₱1,743,000.00 covering the balance of the purchase price less the transfer tax, LRI’s share in the
common fund and payables to the Bureau of Internal Revenue (BIR). Rosendo, however, deferred acceptance in
view of the pendency of the cases filed by the directors of LRI against eachother and the order of the Security
and Exchange Commission (SEC), restraining him from acting on LRI matters. 19 Apparently, several cases were
pending with the SEC involving the directors and shareholders of LRI, one of which is Asuncion’s complaint for
the nullification of the August 17, 1981 Board Resolution.

On November 21, 1981, the spouses Tanjangco filed a motion for the production of a copy of the board resolution
authorizing Asuncion to file the complaint on LRI’s behalf. In her Comment, Asuncion claimed that the action is a
derivative suit she initiated as LRI’s minority stockholder, for which no authorization from LRI’s Board of Directors
is necessary.20

On December 7, 1981, Arturo moved to dismiss the complaint on the grounds of lack of jurisdiction and litis
pendentia. With regard to the first ground, Arturo alleged that the case essentially involves an intra-corporate
dispute, which falls within the exclusive jurisdiction of the SEC. As to the second ground, Arturo alleged that
Asuncion filed a complaint with the SEC, which was docketed as SEC Case No. 2164, against him and Benjamin,
seeking to annul the August 17, 1981 Board Resolution. 21

On July 30, 1982, the stockholders of LRI had a meeting where they voted on whether to ratify and confirm the
sale of the subject properties to the spouses Tanjangco. The minutes of such meeting state:

At this juncture, Juanito Santos moved for the ratification and confirmation of the sale of Trade Center Building to
the [spouses Tanjangco] and thereby ratifying and confirming all minutes relative to the sale made to the
[spouses Tanjangco], and the same being seconded, it was placed to a vote amongst the stockholders and
Directors present and the votes were as follows:

Leo Rivera - yes

Rosendo de Leon - yes

Juanito Santos - yes

Benjamin Bernardino - yes

After the ratification and confirmation of the sale of Trade Center Building, Asuncion Lopez stated that she is not
preparing the minutes of today’s meeting as well as that of June 29, 1982 and prior ones, but she was reminded
that if she refuses to do what is incumbent upon her as Secretary, the same would be prepared and if she refuses
to sign, that’s up to her, for the corporation is governed by the Board of Directors coupled by the majority of the
stockholders who ratify the acts of the Board.

That the sale of Trade Center Building in point of stockholders and in point of the Board of Directors had been
duly ratified and confirmed and likewise it was moved and seconded that the votes will be submitted to the
Securities and Exchange Commission (SEC) in order that the said office may be properly apprised of the situation
of Lopez Realty, Inc.

There being no further business to take up, upon motion and duly seconded, the meeting [is] adjourned.22

On November 11, 1982, the executor of Teresita’s estate, Juanito L. Santos (Juanito), moved to intervene, stating
among others that the case is "basically an intra-corporate contest among the stockholders of LRI in respect to
the sale or disposition of corporate property and the distribution of the proceeds thereof." 23

Page 198 of 343

On February 6, 1984, the trial court issued an order, denying the spouses Tanjangco’s, Juanito’s and Arturo’s
respective motions.24

On March 1, 1985, Asuncion and Arturo filed a Joint Motion to Dismiss in SEC Case No. 2164 on the ground that a
"final settlement has been arrived at and that they hereby waive and renounce any further claim or counterclaim
that they may have against each other x x x." This was granted by the SEC. 25

The petitioners then filed a supplemental complaint, claiming that the negotiations between the parties to settle
the case resulted in an agreement where the spouses Tanjangco would sell to the petitioners their interest in the
subject properties for ₱6,000,000.00 on the condition that the petitioners would return the ₱1,800,000.00 the
spouses Tanjangco paid to LRI. According to the petitioners, in order for Asuncion to meet her obligations under
the agreement, she borrowed ₱4,000,000.00 from a bank at a high interest, sold her house at Magallanes for less
than its market value and disposed several pieces of her jewelry. However, during the formal signing of the
agreement, the spouses Tanjangco refused to sign for no apparent reason. The petitioners thus prayedthat the
spouses Tanjangco be compelled to sign and indemnify Asuncion for the damages she incurred.26

During the trial, the petitioners, among others, attempted to establish that the subject sale had not been validly
ratified during the July 30, 1982 stockholders’ meeting in view of the failure to meet the required number of
votes. Asuncion testified that Juanito was not qualified to sit as a director during the said meeting there being no
evidence that he owned at least one share. Asuncion likewise testified that Leo actually voted against the
ratification of the sale, contrary to what is stated in the minutes, which she and Leo did not sign. 27

After trial on the merits, the trial court issued a Decision 28 on June 25, 1997, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered, thus:

1. Declaring null and void the Deed of Sale, dated 5 October 1981, signed by defendant Arturo Lopez, in
behalf of Lopez Realty[,] Inc., and defendants Spouses Reynaldo and Maria Luisa Tanjangco, involving the
interest of Lopez Realty, Inc. in the Trade Center Building;

2. Directing the Register of Deeds of Manila to cancel Transfer Certificate of Title Nos. 145983, 145984
and 145985 in the name of Maria Luisa Arguelles married to Reynaldo Tanjangco and to reinstate
Transfer Certificates of Title Nos. 127778, 127779 and 127780 in the names of Lopez Realty, Inc. and Maria
Luisa Arguelles married to Reynaldo Tanjangco;

3. Directing defendants Spouses Reynaldo and Maria Luisa Tanjangco to make an accounting of all the
rentals they collected from the Trade Center Building from 5 October 1981 and, thereafter, to remit to
plaintiff, Lopez Realty, Inc., one-half (1/2) of the net amount (after deducting reasonable expenses), plus
yearly interest in the amount of 12% until fully paid, all within 90 days from the finality of this decision;

4. Directing plaintiff Lopez Realty, Inc. to return to defendants spouses Reynaldo and Maria Luisa
Tanjangco the amount of ₱1,800,000.00; and,

5. Directing defendants, SpousesReynaldo and Maria Luisa Tanjangco to pay plaintiff the amount of
₱150,000.00 as attorney’s fees.

SO ORDERED.29

Finding the sale null and void, the trial court ruled that Arturo lacked the authority to sell LRI’s interest on the
subject properties to the spouses Tanjangco on LRI’s behalf in view of the procedural infirmities which attended
the meeting held on August 17, 1981. Specifically:

On this issue, the Court rules in favor of the plaintiff. There is merit in plaintiff’s contention that the 17 August 1981
meeting of the Board of Directors of Lopez Realty was illegal. Section 53 of the Corporation Code of the
Philippines categorically provides:
Page 199 of 343
"Sec. 53. Regular and Special Meeting[s] of Directors [or] Trustees — Regular meeting of the board of directors or
trustees of every corporation [shall be] held monthly[,] unless the by-lawsprovides [sic] otherwise.

xxxx

Meeting[s] of directors or trustees of corporations may be held [anywhere] in or outside [of] the Philippines,
unless the by-laws provides [sic] otherwise. Notice of the regular or special meeting[s] stating the date, time and
place of the meeting must be sent to every director or trustee, at least, one (1) day prior to the scheduled
meeting[,] unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either
expressly or impliedly."

Plaintiff alleged that no notice was sent to her prior to the 17 August 1981 meeting. The Court is inclined to give
credit to this allegation considering that defendants never contested the same. Hence, the said meeting was
illegal and the resolution adopted during the meeting would not produce the effect of binding the corporation,
Lopez Realty.30

The trial court likewise ruled thatthe sale between LRI and the spouses Tanjangco was not validly ratified in the
absence of the required number of votes. Thus:

Notwithstanding the assertions of the defendants, the Court gives credit to plaintiff[’s] claim. The claim, which was
made under oath, has not been contested by defendants. Besides, the copy of the minutes itself x x x
corroborates it. From a physical examination of said minutes, it appears that among the five alleged directors
present[,]only de Leon, Bernardino and Santos signed over their names at the bottom of the minutes. Gonzalez
and Rivera, whose names are also written thereon do not have their signatures on. Since the vote of Santos does
not count, he not being qualified to sit as director, only the two votes de Leon and Bernardino count for
ratification. But that did not constitute a majority vote. Consequently, there was no validratification of the sale of
Lopez Realty’s interest in the Trade Center Building. The sale has remained invalid and not binding upon the
corporation.31

Nonetheless, the trial court denied Asuncion’s claim for damages as there is no legal compulsion for the spouses
Tanjangco to honor a compromise agreement that was not perfected prior to its reduction into writing. Thus:

Concerning the third issue, the Court finds no valid reason to compel defendants to sign the alleged compromise
agreement.1âwphi1 Granting that defendants Tanjangcos did signify initially their conformity with the terms and
conditions of the compromise agreement as alleged by plaintiff, the same did not reach maturity prior to its
execution in writing. Hence, defendants did not commit breach of contract when, afterwards, they refused to sign
the compromise agreement.32

On both parties’ appeal to the CA, the trial court’s Decision dated June 25, 1997 was reversed. In its Decision
dated February 22, 2002, the CA recognized Arturo’s authority tosell LRI’s interest on the subject properties,
holding that this Court had earlier declared the August 17, 1981 Board Resolution as valid in Lopez Realty, Inc. v.
Fontecha.33Thus:

It is to be recalled that the validity of the board meeting of August 17, 1981 has already been challenged before
the high court, albeit, on another matter. In Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995], the same
plaintiffs-appellants challenged the validity of the board resolution granting gratuity pay and other benefits to
some of the company’s employees on the ground that the meeting was allegedly convened without prior notice
to the directors. The high court, citing American jurisprudence, ruled that the [sic] "an action of the board of
directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of
the directors in subsequent legal meeting, or impliedly, by the corporation’s subsequent course of conduct." x x x
In holding the meeting to have been valid, the same Court, among others, considered the following
circumstances: petitioner corporation did not issue any resolution revoking or nullifying the board resolutions
granting gratuity pay; and, petitioner therein Asuncion Lopez-Gonzales was aware of the said obligations and
even acquiesced thereto by signing two of the checks for gratuity pay. In the case at bench, it was duly
established that the matter of the sale of the property to the Tanjangcos has been taken up in the subsequent
Page 200 of 343
meetings of the corporation culminating in the meeting of July 30, 1982, where the stockholders ratified and
confirmed not only the sale of Trade Center Building to the appellants Tanjan[g]cos but also all minutes relative
to the said sale. It likewise appears that in the aforesaid July 30, 1982 meeting, appellant Gonzales was present
and was clearly outvoted by the other stockholders. 34

The CA likewise ruled that whatever infirmity attended the August 17, 1981 Board Resolution was cured by
ratification of the majority of the directors in the joint stockholders and directors meeting held on July 30, 1982.
Furthermore, the CA figured that even if Juanito’s vote is disregarded, the ratification was approved by the
majority of the board, including Leo, whose signatureis nowhere on the minutes:

Based on a perusal of the title ofthe minutes, "MINUTES OF THE MEETING OF THE STOCKHOLDERS AND BOARD
OF DIRECTORS OF LOPEZ REALTY, INCORPORATED HELD AT ITS PRINCIPAL OFFICE AT RM. 404 DON. PAQUITO
BUILDING, 99 DASMARINAS STREET, BINONDO, MANILA ON FRIDAY, JULY 30, 1982 AT 2:00 P.M.," x x x it is
immediately apparent that the meeting was a joint board and stockholders’ meeting. The manner of taking the
roll of attendance likewise confirms the participation of the attendees as stockholders,-

"PRESENT:

Ms. SONY LOPEZ 7,831 shares

Mr. BENJAMIN B. BERNARDINO 1 share

and representing Arturo F.Lopez 7,831 shares

Mr. JUANITO L. SANTOS (representing the Estate 7,830 shares

of Teresita Lopez Marquez)

Mr. LEO RIVERA 1 share

Mr. ROSENDO DE LEON 5 shares

TOTAL SHARES REPRESENTED 23,499 shares

xxxx

while the minutes of the meeting shows that there were instances when the attendees were asked to vote as
directors x x x.

Under Section 40 of the Corporation Code-

Section 40. Sale or other disposition of assets.– Subject to the provisions of existing laws on illegal combinations
and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill,
upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or consideration, as its board of directors or trustees
may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.

Page 201 of 343

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which
it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of
property and assets, subject tothe rights of third parties under any contract relating thereto, without further
action or approval by the stockholders or members.

xxxx

the sale of the company assets requires the majority vote of the board of directors and vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock. In the minutes of the July 30, 1982 meeting,
the matter of the sale of the subject property was put to a vote "among stockholders and Directors present" x x x
jointly assembled, hence, a joint vote. Going back to the board of directors, even excluding the affirmative vote of
Juanito Santos whose qualification as director was questioned by appellant Gonzales, the votes of Leo Rivera,
Benjamin Bernardino and Rosendo de Leon, as directors, forms the majority required for the ratification of the
sale, as contemplated in the abovequoted provision of the Corporation Code. Although the tally of votes did not
indicate the capacity under which the votes were taken[.] We follow the high court’s ruling in Zamboanga
Transportation Co. vs. Bachrach Motor Co.,52 Phil. 244, 259-[2]60 [1928], thus:

"We therefore conclude that when the president of the corporation, who is one ofthe principal stockholders and
at the same time its general manager, auditor, attorney or legal adviser, is empowered by its by-laws to enter into
chattel mortgage contracts, subject to the approval of the board of directors, and enters into such contracts with
the tacit approval of two other members of the board of directors, one of whom is alsoa principal shareholder,
both of whom, together with the president, form a majority, and said corporation takes advantage of the benefits
afforded by said contract, such acts are equivalent to an implied ratification of said contract by the board of
directors and binds the corporation even if not formally approved by said board of directors as required by the
by-laws of the aforesaid corporation."

When therefore the aforementioned three directors voted in favor of the ratification, their votes are, at the very
least, tacit approval sufficient for the application of the aforequoted ruling. It is of no moment that the signature
of only two directors appears at the bottom of the minutes, for it does not refer to the results of the voting.

On the part of the stockholders, it appears that Leo Rivera, Rosendo De Leon, Juanito Santos and Benjamin
Bernardino, two of them representing two principal stockholders, voted to ratify the sale of the property to the
appellants Tanjangcos. The cumulation of their votes constitute sixty-seven per cent [sic] or two-thirds of the
capital stock of the appellant company. The contract has thus, been validly ratified. 35

The CA nonetheless upheld the trial court’s jurisdiction over the petitioners’ complaint and Asuncion’s right to
bring an action on LRI’s behalf in this wise:

Assailing the trial court’s jurisdiction over the complaint filed in the court below, the following grounds were
adduced to assail it, to wit: first, it involves an intra-corporate controversy falling under the original and exclusive
jurisdiction of the Securities and Exchange Commission under Section 5(b) of P.D. No. 902-A; and, second,
appellant Gonzales has no legal personality to institute the case.

In the determination of whether the Securities and Exchange Commission ("SEC") shall have jurisdiction over the
complaint, there must be a concurrence of [the] following elements, to wit: "(1) the status or relationship of the
parties; and (2) the nature of the question that is the subject of their controversy." x x x The Court further
explained it in this wise:

"The first element requires that the controversy must arise out of intracorporate or partnership relations between
and among stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such corporation,
Page 202 of 343
partnership or association and the State insofar as it concerns their individual franchises. The second element
requires that the dispute among the parties be intrinsically connected with the regulation of the corporation,
partnership or association or dealwith the internal affairs of the corporation, partnership or association. After all,
the principal function of the SEC is the supervision and control of corporations, partnerships and associations with
the end in view that investments in these entities may be encouraged and protected, and their activities pursued
for the promotion of economic development." x x x Reading the title of the Complaint, dated October 31, 1981,
designated as one for annulment ofsale, cancellation of title, reconveyance and damages with prayer for the
issuance of a writ of preliminary prohibitory injunction x x x, it is immediately apparent that the principal
defendants being sued are not "stockholders, members of associates" of the appellant Lopez Realty, Inc., but
rather vendees of the subject property. x x x In Dee vs. Securities and Exchange Commission, 199 SCRA 238, 250
[1991], the Supreme Court summarized Section 5 of

P.D. No. 902-A in the following manner:

"In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the
following relationships: (a) between corporation, partnership or association and the public; (b) between the
corporation, partnership or association and its stockholders, partners, members, or officers;(c) between the
corporation, partnership or association and the state insofar as its franchise, permit or license to operate is
concerned; and (d) among the stockholders, partners or associates themselves.["] x x x

Since the principal defendants-appellants, the Spouses Tanjangcos, are not connected, in the above described
manner,to appellant Lopez Realty, Inc., then the SEC has no jurisdiction overthe case. Moreover, upon a further
reading of the body of the complaint, it appears that the annulment of the sale to the appellants Tanjangcos was
being sought on the ground of the lack of valid consent on the part of Lopez Realty, Inc., the vendor. The internal
affairs of the corporation were being brought into the controversy merely to prove that it never authorized
appellant Arturo Lopez to execute the deed of sale. Hence, the controversy is not intrinsically connected to the
regulation or operation of the corporation, negating the existence of the second element as required in Lozano
vs. delos Santos, x x x.

As to the alleged legal personality of appellant Asuncion Lopez- Gonzalez, to file the action in the court below,
although the Corporation Code does not contain any provision granting such right, the Supreme Court has
recognized derivative suits, as valid, provided the following requisites are complied with, to wit:

"a) the party bringing suit be a shareholder as of the time of the act or transaction complained of; b) he has
exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief
butthe latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the
corporation and not to the particular stockholder bringing the suit[.]" x x x Appellant Gonzales has been duly
established to be a major stockholder in appellant company and she registeredher opposition to the sale, by
cable sent on August 25, 1981, as reflected in the Minutes of the Meeting of the Board of Directors on September
16, 1981 x x x on the ground that the corporation would be prejudiced by the extremely low price.

The rationale for vesting the appellant Gonzales with the legal personality to file the suit may be found in the
following summary of the two leading cases on derivative suits, Atwol vs. Merriwether, 1867, and Dodge vs.
Woolsey, 1855, respectively promulgated in England and America: "that where corporate directors have
committed a breach of trust either by their frauds, [ultra] viresacts, or negligence, and the corporation is unable
or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf of
himself and other stockholders and for the benefit of the corporation, to bring about a redress for the wrong
done directly to the corporation and indirectly to the stockholders." x x x 36

The CA also concurred with the trial court’s finding that the parties never arrived at a perfected compromise
agreement. Thus:

Page 203 of 343

We are persuaded that the trial court did not commit any error in determining that there was no perfected
compromise agreement between the appellants. It is noted that based on the aforequoted testimony, appellant
Gonzales was herself aware of the negotiation stage of the proceedings when she allowed the appellants
Tanjangcos to add conditions to the option she has chosen. The counsel of appellant Gonzales was likewise of
the same opinion when he took the liberty of suggesting the additional provision on tax clearance, although [t]he
latter removed it upon conferring with the counsel of appellants Tanjangcos. The aforesaid proceedings are
consistent with the process of making reciprocal concessions, characteristic of entering into a compromise. x x x
Hence, in Sanchez vs. Court of Appeals, 279 SCRA 647, 676 [1997], the High Court acknowledged the long and
tedious process of negotiations undergone by the parties and declared, to wit: "Since this compromise
agreement was the result of a long drawn out process, with all the parties ably striving to protect their respective
interests and to come out with the best they could, there can beno doubt that the parties entered into it freely
and voluntarily. Accordingly, they should be bound thereby. To be valid, it is merely required under the law to be
based on real claims and actually agreed upon in good faith by the parties thereto." x x x Unfortunately, in the
case at bench, the parties never came to an agreement due to the fact that the appellants Tanjangcos backedout.
x x x When the appellants Tanjangcos "backed out" or refused tosign the final draft, there was no meeting of the
minds or actual agreement between the parties. x x x.

Resolving the claim of damages allegedly sustained when appellant Gonzales sold some of her assets and
contracted a sizable loan to cover the consideration of the compromise agreement[.] We find no legal basis for
its award. She acted based on an optimistic expectation that the final draft of the compromise agreement would
be acceptable to the appellants Tanjangcos. Hence, she testified that she sold her house and lot, as far back as
December 1, 1987, orlong before the alleged meeting at the chambers of Judge Paguio x x x. Upon further
questioning, she revealed that she sold it: "because even prior to March 1, 1988, we have been already
negotiating about the compromise and knew beforehand that I have to be ready, and I even thought that the
price was a good one reason why I sold it because I knew then thatit was a sacrifice price. I would say, that it was
a sacrifice price because after a few days someone who live nearby, at the corner, came to me and was even
buying the property [at] a higher price." x x x She thus, acted based on the expectation of a settlement and not
on the alleged belief that there was already a perfected compromise agreement between her and the appellants
Tanjangcos. She even admitted that the negotiations took some time because the parties could not come up with
agreeable terms and she herself had to do study the matter. x x x It follows then that the sale of her properties
and the loans obtained from the banks were merely tactical errors on her part for which she has no recourse
under the law.37

The Petitioner’s Case

Arguing for the nullity of the sale and the existence of a perfected compromise agreement, the petitionersclaim
that: (a) the August 17, 1981 meeting, where the Resolution authorizing Arturo to negotiate for the sale of the
subject properties was approved, is illegal for lack of notice to Asuncion as required under Section 50 of the
Corporation Code; (b) Fontecha does not constitute res judicata insofar as the issue on the validity of the August
17, 1981 meeting and all the resolutions passed therein, including the grant of authority to Arturo, are concerned;
(c) in Fontecha, what was ruled as having been ratified was the resolution granting gratuity pay to its retiring
employees and there was nothing mentioned about the resolution on the sale of the subject properties and
Arturo’s authority to act on LRI’s behalf; (d) it cannot be rightfully claimed that the August 17, 1981 Board
Resolution had been ratified as Asuncion immediately registered her objections to its validity. The Board of
Directors responded to this by issuing the September 1, 1981 and September 16, 1981 Board Resolutions that held
the subject sale on abeyance; (e) the August 17, 1981 Board Resolution merely authorized Arturo to "negotiate"
for the sale of the subject properties and the way it was worded does not indicate that this include the authority
to conclude a sale with the spouses Tanjangco; (f) even if the July 27, 1981 and August 17, 1981 Board Resolution
are read together to support the claim of the spouses Tanjangco that Arturo had been duly authorized to sell the
subject properties, the latter acted beyond the authority granted to him when he entered into a sale with the
former the terms of which substantially depart from those provided in the July 27, 1981 Resolutions; (g) there was
not enough votes to ratify the subject salesince Juanito’s qualification as director had been effectively challenged
and Leo actually voted against such ratification; (h) there was a perfected compromise agreement between the
parties and there is no need for the same to be in writing for it to be considered as such; and (i) even assuming

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that there was no perfected compromise agreement, the spouses Tanjangco abused their right for having backed
out and withdrawn their offer without reason resulting in damage to Asuncion.

The Spouses Tanjangco’s Case

On the other hand, the spouses Tanjangco assert the validity of the subject sale, Arturo’s authority to represent
LRI in such a sale and the absence of a perfected compromise agreement, alleging that: (a) as clearly stated in the
July 27, 1981 Board Resolution, the sale was perfected when Asuncion failed to match or outdo the offer of the
spouses Tanjangco within the provided period; (b) reading the August 17, 1981 Board Resolution in conjunction
with the July 27, 1981 Board Resolution, Arturo’s mandate was to carry out or implement the July27, 1981 Board
Resolution and his authority was not limited to negotiating with the sale of the subject properties; (c) the
petitioners do not dispute the validity of the July 27, 1981 Board Resolution and Asuncion’s failure to match the
offer of the spouses Tanjangco; (d) the spouses Tanjangco are buyers in good faith and they cannot be
prejudiced by the corporate squabbles among the directors and stockholders of LRI; (e) the provisions ofthe
Deed of Sale are in accordance with the July 27, 1981 Board Resolution;(f) under the doctrine of apparent
authority, the petitioners are barred from questioning LRI’s consent to the subject sale and Arturo’s authority to
represent LRI in such transaction; (g) the spouses Tanjangco have the right torely on the minutes of the July 27,
1981 and August 17, 1981 Board Resolutions which appear to be regular on their face; (h) SEC Case No. 2164, a
case filed by Asuncion against Arturo questioning the validity of August 17, 1981 Board Resolution, was dismissed
on joint motion of Arturo and Asuncion on the ground that "a final settlement has been arrived at"; (i) contrary to
the petitioner’s claim, the August 17, 1981 Board Resolution had not been revoked; (j) the sale had been ratified
during July 30, 1982 meeting of the stockholders and by LRI’s acceptance of the spouses Tanjangco’s payment;
and (k) withrespect to the compromise agreement, the evidence on record shows that the parties never went
beyond the negotiation phase.

Ruling of the Court

Ratification of the August 17, 1981

Board Resolution

The Court agrees with the petitioners that the August 17, 1981 Board Resolution did not give Arturo the authority
to act as LRI’s representative in the subject sale, as the meeting of the board of directors where such was passed
was conducted without giving any notice to Asuncion. Section 53 of the Corporation Code provides for the
following:

SEC. 53. Regular and special meetings of directors or trustees.—Regular meetings of the board of directors or
trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon call of the president oras
provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless
the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the
meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless
otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.
(Emphasis ours)

The Court took this matter up in Fontecha, involving herein parties, where it was held that a meeting of the board
of directors is legally infirm if there is failure to comply with the requirements or formalities of the law or the
corporation’s by laws and any action taken on such meeting may be challenged as a consequence:

The general rule is that a corporation, through its board of directors, should act in the manner and within the
formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting
called pursuant tothe law or the corporation’s bylaws, otherwise, any action taken therein may be questioned by
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any objecting director or shareholder.38 However, the actions taken in such a meeting by the directors or trustees
may be ratified expressly or impliedly. "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. The substance of the doctrine is confirmation after conduct, amounting to a substitute for
a prior authority. 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."39

The Court's decision in Fontecha concerns the implied ratification of one of the resolutions passed on August 17,
1981 by the board of directors of LRI despite of the lack of notice of meeting to Asuncion. This was owing to the
subsequent actions taken therein by the stockholders, including Asuncion herself, as cited by the CA in its
decision. On the other hand, the sale of the property to the spouses Tanjangco was ratified, not because of
implied ratification as was the case in Fontecha but through the passage of the July 30, 1982 Board Resolution.

In the present case, the ratification was expressed through the July 30, 1982 Board Resolution. Asuncion claims
that the July 30, 1982 Board Resolution did not ratify the Board Resolution dated August 17, 1981 for lack of the
required number of votes because Juanito is not entitled to vote while Leo voted "no" to the ratification ofthe sale
even if the minutes stated otherwise. Asuncion assails the authority of Juanito to vote because he was not a
director and he did not own any share of stock which would qualify him to be one. On the contrary, Juanito
defends his right to vote as the representative of Teresita’s estate. Upon examination of the July 30, 1982 minutes
of the meeting, it can be deduced that the meeting is a joint stockholders and directors’ meeting. The Court take s
into account that majority of the board of directors except for Asuncion, had already approved of the sale to the
spouses Tanjangco prior to this meeting. As a consequence, the power to ratify the previous resolutions and
actions of the board of directors in this case lies inthe stockholders, not in the board of directors. It would be
absurd to require the board of directors to ratify their own acts—acts which the same directors already approved
of beforehand. Hence, Juanito, as the administrator of Teresita’s estate even though not a director, is entitled to
vote on behalf of Teresita’s estate as the administrator thereof. The Court reiterates its ruling in Tan v. Sycip, 40 viz:

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the
executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to
vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the
administrator or executor.41 (Citation omitted and emphasis ours)

On the issue that Leo votedagainst the ratification of sale, the Court notes that only Juanito, Benjamin and
Rosendo signed the minutes of the meeting. It was also not stated who prepared the minutes, given that
Asuncion as the corporate secretary refused to record the same. Also, it was not explained why Leo was not able
to affix his signature on the said minutes if he really voted in favor ofthe ratification of the sale. What’s more, Leo
was not presented to testify onthe witness stand. Hence, contrary to the position adopted by the CA, only those
whose signatures appear on the minutes of the meeting can be said to have voted in favor of the ratification. This
case must be differentiated from the Court’s ruling in People v. Dumlao, et al. 42

In Dumlao, the Court ruled that the signing of the minutes by all the directors is not a requisite and that the lack
of signatures on the minutes does not mean that the resolution was not passed by the board. However, there is a
notable disparity between the facts in Dumlaoand the instant case. In Dumlao, the corporate secretary therein
recorded, prepared and certified the correctness of the minutes of the meeting despite the fact that not all
directors signed the minutes. In this case, it could not even be established who recorded the minutes in view of
Asuncion’s refusal to do so, as demonstrated during the cross examination of Benjamin by the petitioners’
counsel:

Q: I am showing to you Exhibit 14, I noticed that Exhibit 14 which is the minutes of the meeting of the
stockholders on July 30, 1982 was not prepared by a secretary but was prepared by some members of the board.

A: I cannot recall anymore. I cannot give you an opinion on that, because I will be guessing.

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Q: From the minutes itself?

A: That is why I told you I cannot be certain if it was prepared by the secretary or members of the board. This
came into existence. Eleven years ago is not a very short period.

Q: So you cannot remember now who prepared the minutes of the meeting on July 17, 1982? A: I cannot be
accurate - - I said that.43

It is the signature of the corporate secretary, as the one who is tasked to prepare and record the minutes, that
gives the minutes of the meeting probative value and credibility, as the Court explained in Dumlao, to wit:

The non-signing by the majority of the members of the GSIS Board of Trustees of the said minutes does not
necessarily mean that the supposed resolution was not approved by the board. The signing of the minutes by all
the members of the board is not required. There is no provision in the Corporation Code of the Philippines that
requires that the minutes of the meeting should be signed by all the members of the board.

The proper custodian of the books, minutes and official records of a corporation is usually the corporate
secretary. Being the custodian of corporate records, the corporate secretary has the duty to record and prepare
the minutes of the meeting. The signature of the corporate secretary gives the minutes of the meeting probative
value and credibility. In this case, Antonio Eduardo B. Nachura, Deputy Corporate Secretary, recorded, prepared
and certified the correctness of the minutes of the meeting of 23 April 1982; and the same was confirmed by
Leonilo M. Ocampo, Chairman of the GSIS Board of Trustees. Said minutes contained the statement that the
board approved the sale of the properties, subject matter of this case, to respondent La’o. 44 (Citations omitted
and emphasis ours)

Thus, without the certification of the corporate secretary, it is incumbent upon the other directors or stockholders
as the case may be, to submit proof that the minutes of the meeting is accurate and reflective of what transpired
during the meeting. Conformably to the foregoing, in the absence of Asuncion’s certification, only Juanito,
Benjamin and Rosendo, whose signatures appeared on the minutes, could be considered as to have ratified the
sale to the spouses Tanjangco.

Yet, notwithstanding the lack of Leo’s signature to prove that he indeed voted in favor of the ratification,the
results are just the same for he owns one share of stock only. Pitted against the shares of the other stockholders
who voted in favor of ratification, Asuncion and Leo were clearly outvoted:

Ms. [ASUNCION] LOPEZ 7, 831 shares

Mr. BENJAMIN B. BERNARDINO 1 share

and representing Arturo F. Lopez 7, 831 shares

Mr. JUANITO L. SANTOS

(representing the Estate of Teresita Lopez Marquez) 7, 830 shares

Mr. LEO RIVERA 1 share

Mr. ROSENDO DE LEON 5 shares

TOTAL SHARES REPRESENTED 23, 499 shares45

In sum, whatever defect there was on the sale to the spouses Tanjangco pursuant to the August 17, 1981 Board
Resolution, the same was cured through its ratification in the July 30, 1982 Board Resolution. It is of no moment
whether Arturo was authorized to merely negotiate or to enter into a contract of sale on behalf of LRI as all his
actions in connection to the sale were expressly ratified by the stockholders holding 67% of the outstanding
capital stock.1âwphi1

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In Cua, Jr. et al. v. Tan, et al.,46 the Court held that by virtue of ratification, the acts of the board of directors
become the acts of the stockholders themselves, even if those acts were, at the outset, unauthorized:

Clearly, the acquisition by PRCI of JTH and the constitution of the JTH Board of Directors are no longer just the
acts of the majority of the PRCI Board of Directors, but also of the majority of the PRCI stockholders. By
ratification, even an unauthorized act of an agent becomes the authorized act of the principal. To declare the
Resolution dated 26 September 2006 of the PRCI Board of Directors null and void will serve no practical use or
value, or affect any of the rights of the parties, because the Resolution dated 7 November 2006 of the PRCI
stockholders - approving and ratifying said acquisition and the manner in which PRCI shall constitute the JTH
Board of Directors – will still remain valid and binding.47 (Citation omitted and emphasis ours) Compromise
agreement

The remaining issue is whether the spouses Tanjangco could be held liable for damages for reneging on an
alleged verbal compromise agreement.

There is no reason for the Court to disturb the unanimous findings of the CA and the trial court that no
compromise agreement was perfected between the parties. The existence of a perfected contract is a finding of
fact that the Court will not disturb if there is substantial evidence supporting it. "Basic is the rule that factual
findings of trial courts, including their assessment of the witnesses' credibility, are entitled to great weight and
respect by this Court, particularly when the [CA] affirms the findings." 48 For this reason, the spouses Tanjangco
may not be compelled to honor a compromise agreement that never left the negotiation phase and be held
liable for the alleged damages Asuncion incurred as a result of her attempts to comply to the provisions thereof.

WHEREFORE, the instant petition is DENIED. The Decision dated February 22, 2002 of the Court of Appeals in CA-
G.R. CV No. 63519 is hereby AFFIRMED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR
MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur),
which seeks to reverse the October 1, 2010 Decision 1 and the February 15, 2011 Resolution of the Court of Appeals
(CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province
of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that
the areas where it wanted to undertake exploration and mining activities where already covered by Mineral
Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

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Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an
MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the
Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720
hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos
Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise
Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB,
Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an
area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently,
PLMDC conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of
Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154
(formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra,
Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said
MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions
for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned
and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since
MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs
over the areas covered by applications since it knows that it can only participate in mining activities through
corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were
mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which
are reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No.
(RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or
plural, shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation,
partnership, association, or cooperative organized or authorized for the purpose of engaging in mining, with
technical and financial capability to undertake mineral resources development and duly registered in accordance
with law at least sixty per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That
a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and
AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the
issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60%
of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares
of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of
McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will
not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool
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used in determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the
Foreign Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction over the issues
in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont
has no personality to sue them because it has no pending claim or application over the areas applied for by
petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other
hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by the MPSA
application of respondents may be considered if and when they are qualified under the law. The violation of the
requirements for the issuance and/or grant of permits over mining areas is clearly established thus, there is
reason to believe that the cancellation and/or revocation of permits already issued under the premises is in order
and open the areas covered to other qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and
Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as
Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL
AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian
company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs.
Thereafter, on February 7, 2008, the POA issued an Order 7 denying the Motion for Reconsideration filed by
petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal 8 and
Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of
Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also,
through a letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs.
McArthur’s FTAA was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was
converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30,
2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint 15 with the
Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration of
petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining in violation
of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend
Proceeding before the MAB praying for the suspension of the proceedings on the appeals filed by McArthur,
Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92
(RTC) a Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ
of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB
proceedings pending the resolution of the Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an
Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case
Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for
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Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January
2007 is hereby ordered DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order 18 granting Redmont’s application for a TRO and
setting the case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the September 10, 2008
Order of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration 20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint 21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining
the MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for
Reconsideration and Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On
October 1, 2010, the CA rendered a Decision, the dispositive of which reads:

WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1,
2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the
Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign
corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement
should be recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left
for determination by the Secretary of the DENR and the President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when
it realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians.
Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining
to the exploitation of natural resources, the CA used the "grandfather rule" to determine the nationality of
petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation
or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to
aliens.24(emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned
majority of the common stocks of the petitioners as well as at least 60% equity interest of other majority
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shareholders of petitioners through joint venture agreements. The CA found that through a "web of corporate
layering, it is clear that one common controlling investor in all mining corporations involved x x x is
MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-
in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications
suspicious in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by
the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has
jurisdiction over them and that it also has the power to determine the of nationality of petitioners as a
prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture or production-
sharing agreements" of the state to mining rights. However, it also stated that the POA’s jurisdiction is limited
only to the resolution of the dispute and not on the approval or rejection of the MPSAs. It stipulated that only the
Secretary of the DENR is vested with the power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners
McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s declaration
that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated
May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision 26 on April 6, 2011, wherein
it canceled and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small
Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment
Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that
petitioners committed violations against the abovementioned laws and failed to submit evidence to negate them.
The Decision further quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation
and claims made by petitioners of being domestic or Filipino corporations and the admitted continued mining
operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an
MPSA application which was eventually transferred to Narra. It also agreed with the POA’s estimation that the
filing of the FTAA applications by petitioners is a clear admission that they are "not capable of conducting a large
scale mining operation and that they need the financial and technical assistance of a foreign entity in their
operation, that is why they sought the participation of MBMI Resources, Inc." 28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts. 29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA,
docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision
and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now
pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the
following errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the
subject matter of the controversy, the MPSA Applications, have already been converted into FTAA
applications and that the same have already been granted.
Page 212 of 343
 II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the
Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum
shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of
1991, as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is based on mere conjectures and surmises without
any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue
of supervening events, so that a declaration thereon would be of no practical use or value." 32 Thus, the courts
"generally decline jurisdiction over the case or dismiss it on the ground of mootness." 33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of
"mootness" will not deter the courts from trying a case when there is a valid reason to do so. In David v.
Macapagal-Arroyo (David), the Court provided four instances where courts can decide an otherwise moot case,
thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the
bar, and the public; and

4.) The case is capable of repetition yet evading review. 34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of
the Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our
country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The
intricate corporate layering utilized by the Canadian company, MBMI, is of exceptional character and involves

Page 213 of 343

paramount public interest since it undeniably affects the exploitation of our Country’s natural resources. The
corresponding actions of petitioners during the lifetime and existence of the instant case raise questions as what
principle is to be applied to cases with similar issues. No definite ruling on such principle has been pronounced
by the Court; hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench,
the bar and the public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian
company, MBMI, can keep on utilizing dummy Filipino corporations through various schemes of corporate
layering and conversion of applications to skirt the constitutional prohibition against foreign mining in Philippine
soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the
conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against
them since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on
the prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would
want us to correct the CA’s finding which deemed the aforementioned conversions of applications as suspicious
in nature, since it is based on mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The
changing of applications by petitioners from one type to another just because a case was filed against them, in
truth, would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion
not stem from the case challenging their citizenship and to have the case dismissed against them for being
"moot"? It is quite obvious that it is petitioners’ strategy to have the case dismissed against them for being
"moot."

Consider the history of this case and how petitioners responded to every action done by the court or appropriate
government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA
applications of petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA
applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect change of
applications while the case was pending before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents
are not capable of conducting a large scale mining operation and that they need the financial and technical
assistance of a foreign entity in their operation that is why they sought the participation of MBMI Resources, Inc.
The participation of MBMI in the corporation only proves the fact that it is the Canadian company that will
provide the finances and the resources to operate the mining areas for the greater benefit and interest of the
same and not the Filipino stockholders who only have a less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts. 36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside
the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of
the POA of the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the
rejection of their MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA
applications or conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination
of the Secretary of the DENR and the President of the Republic of the Philippines.37
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In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition
asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No.
05-2010-IVB, which rendered the petition moot and academic. However, the CA, in a Resolution dated February
15, 2011 denied their motion for being a mere "rehash of their claims and defenses."38 Standing firm on its
Decision, the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners
elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA.
Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review was filed,
cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are foreign
corporations since they needed the financial strength of MBMI, Inc. in order to conduct large scale mining
operations. The OP Decision also based the cancellation on the misrepresentation of facts and the violation of the
"Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign
Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s
Decision and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their
old arguments claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a
Manifestation and Submission dated October 19, 2012,40 wherein they asserted that the present petition is moot
since, in a remarkable turn of events, MBMI was able to sell/assign all its shares/interest in the "holding
companies" to DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final
act, wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding
companies" to DMCI, only proves that they were in fact not Filipino corporations from the start. The recent
divesting of interest by MBMI will not change the stand of this Court with respect to the nationality of petitioners
prior the suspicious change in their corporate structures. The new documents filed by petitioners are factual
evidence that this Court has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have
violated several mining laws and made misrepresentations and falsehood in their applications for FTAA which
lead to the revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around
the law using shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot
in itself because their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their
previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted
their Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate
ownership to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner
corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and
the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling interests in
enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation

Page 215 of 343

or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos
and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality,"
pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which
provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the
stricter, more stringent grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test"
under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using
the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association
wholly owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding
and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors, in order that the corporation shall be
considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a
"Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule
"has been abandoned and is no longer the applicable rule."41 They also opined that the last portion of Sec. 3 of
the FIA admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear
and unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of
discretion in applying the law. They said that the plain, literal meaning of the statute meant the application of the
control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution
and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule
has already been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of
potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall be under the full control and supervision of
the State. The State may directly undertake such activities, or it may enter into co-production, joint venture or
production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.

xxxx

The President may enter into agreements with Foreign-owned corporations involving either technical or financial
assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on real contributions to the economic
Page 216 of 343
growth and general welfare of the country. In such agreements, the State shall promote the development and use
of local scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the
exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60
percent ownership of capital is pertinent to this case, since the issues are centered on the utilization of our
country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners
since, as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60
percent of such capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is
freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of
the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from
foreign control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in
the cultivation of natural resources, 40 percent involves some control; not total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely,
60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock
of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who
provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of
the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

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With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent
equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the
grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases
where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the
Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution
on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the
honorable framers of our Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for
purposes, among others, of determining compliance with nationality requirements (the ‘Investee Corporation’).
Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by
individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’).
The said rules thus provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee
Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990
Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging
to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the
ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is
at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7
of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership
is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine
nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation
and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino
ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC
Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint
venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%]
invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated
differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not
apply. (emphasis supplied)

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After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of
petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI,
funded them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are
less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince
this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance
where "doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the
said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the
total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to
have "60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in
their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications
will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application
of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent
the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or
indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure,
they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from
SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at
one thousand pesos (PhP 1,000) per share, subscribed to by the following: 44

Name Nationality Number of Shares Amount Subscribed Amount Paid

Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Corporation

MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and
composition as McArthur. In fact, it would seem that MBMI is also a major investor and "controls"45 MBMI and
also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar),
Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

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 Name Nationality Number of Shares Amount Subscribed Amount Paid

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the
number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major
stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with
respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements
with several Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest in the
Olympic Properties.46 Quoting the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a
series of agreements including a Property Purchase and Development Agreement (the Transaction Documents)
with respect to three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction
Documents effectively establish a joint venture between the Company and Olympic for purposes of developing
the Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture.
Under certain circumstances and upon achieving certain milestones, the Company may earn up to a 100%
interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was
utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity
interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000)
divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Page 220 of 343

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate
structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI,
Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Page 221 of 343

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity
between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic,
MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the
amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos
(PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine
hundred pesos (PhP 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate
structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes
petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization
and development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application,
whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock
of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one
thousand pesos (PhP 1,000) per share, shown as follows:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &

Development

Corp.

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Page 222 of 343

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this
corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha South Resources Filipino 6,596 PhP PhP 0

Development Corporation 6,596,000.00

MBMI Resources, Canadian 3,396 PhP PhP

3,396,000.00 2,796,000.00
Inc.

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Page 223 of 343

 Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP

10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid
by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp.
(PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind
the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition,
exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint
control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the
Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the
companies in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and
adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint
venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC
and Narra. Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations
under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control
over the corporations mentioned. In effect, whether looking at the capital structure or the underlying
Page 224 of 343
relationships between and among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or
agent" rule and "admission by privies" under the Rules of Court in the instant case, by pointing out that
statements made by MBMI should not be admitted in this case since it is not a party to the case and that it is not
a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the
scope of his authority and during the existence of the partnership or agency, may be given in evidence against
such party after the partnership or agency is shown by evidence other than such act or declaration itself. The
same rule applies to the act or declaration of a joint owner, joint debtor, or other person jointly interested with
the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission
of the latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must
be shown, and that proof of the fact must be made by evidence other than the admission itself." 49 Thus,
petitioners assert that the CA erred in finding that a partnership relationship exists between them and MBMI
because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a
joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the
CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can
be formed, it should have been formally reduced into writing since the capital involved is more than three
thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to form a partnership between
petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry
to a common fund with the intention of dividing the profits among themselves. 50 On the other hand, joint
ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures
and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin
to a partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are
closely analogous to and substantially the same, if not exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint
venture, very little law being found applicable to one that does not apply to the other. 51

Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that
differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint
venture agreements, rules and legal incidents governing partnerships are applied. 52

Page 225 of 343

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered
between and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are
prohibited from entering into partnership agreements; consequently, corporations enter into joint venture
agreements with other corporations or partnerships for certain transactions in order to form "pseudo
partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations entering into partnerships, then the relationship created
should be deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen as similar to partnerships since the elements of
partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then
the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI
have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has
jurisdiction to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont
against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the
right of Filipinos over mining areas in the Philippines against alleged foreign-owned mining corporations. Such
claim constitutes a "dispute" found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an
application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest,
or opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the
MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement
have been complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar
days from the last date of publication/posting/radio announcement, with the concerned Regional Office or
through any concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing rules and
regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of Arbitrators shall
likewise issue a certification to that effect within five (5) working days from the date of finality of resolution
thereof. Where there is no adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a
Certification to that effect within five working days therefrom.

xxxx

Page 226 of 343

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and
any adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided
in Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications
in areas outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further
evaluation by the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the
Director shall endorse the same to the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days
from receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same
shall be evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days
from receipt of such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under
Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or
conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and
57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the
Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said
Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the
bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last
date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said
forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Department’s Community Environment
and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to
be filed at the Regional Office for resolution of the Panel of Arbitrators. However previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and
any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators.
(Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under
Sec. 77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or
conferment of mining rights.
Page 227 of 343
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and
57 above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the
Panel of Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said
Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the
bulletin boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed contract area is located once a week for two
(2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last
date of publication/posting has been made and no adverse claim, protest or opposition was filed within the said
forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Department’s Community Environment
and Natural Resources Officers (CENRO) or Provincial Environment and Natural Resources Officers (PENRO), to
be filed at the Regional Office for resolution of the Panel of Arbitrators. However, previously published valid and
subsisting mining claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and
any opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators.
(Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or
protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and
oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no
authority to approve or reject said applications. Such power is vested in the DENR Secretary upon
recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas"
has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over
MPSA applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval
or rejection of the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of
the POA, with respect to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is
valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has
jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement
of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Page 228 of 343
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining
areas. One such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by
another interested applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA applications
where petitioners are asserting their rights to mining areas subject of their respective MPSA applications. Since
respondent filed 3 separate petitions for the denial of said applications, then a controversy has developed
between the parties and it is POA’s jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional
Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction.
Euro-med Laboratories v. Province of Batangas 55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise,
specialized training and knowledge of an administrative body, relief must first be obtained in an administrative
proceeding before resort to the courts is had even if the matter may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this
Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the
instant petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of
MBMI to DMCI, a corporation duly organized and existing under Philippine laws and is at least 60% Philippine-
owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the
State should stand since "even wholly-owned foreign corporations can enter into an FTAA with the
State."57Petitioners stress that there should no longer be any issue left as regards their qualification to enter into
FTAA contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the
"grandfather rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would
pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should
be disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877
pending before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned
corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a
non-issue in this case.

Page 229 of 343

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court there is
doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the
corporation, then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated
October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

G.R. No. 203993, April 20, 2015

PRISCILO B. PAZ,*Petitioner, v. NEW INTERNATIONAL ENVIRONMENTAL UNIVERSALITY, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated January 31, 2012 and the
Resolution3 dated October 2, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 00903-MIN, which affirmed the
Decision4 dated May 19, 2006 of the Regional Trial Court of Davao City, Branch 33 (RTC) in Civil Case No. 29,292-
2002, declaring petitioner Captain Priscilo B. Paz (petitioner) liable for breach of contract.

The Facts

On March 1, 2000, petitioner, as the officer-in-charge of the Aircraft Hangar at the Davao International Airport,
Davao City, entered into a Memorandum of Agreement 5 (MOA) with Captain Allan J. Clarke (Capt. Clarke),
President of International Environmental University, whereby for a period of four (4) years, unless pre-terminated
by both parties with six (6) months advance notice, the former shall allow the latter to use the aircraft hangar
space at the said Airport "exclusively for company aircraft/helicopter." 6 Said hangar space was previously leased
to Liberty Aviation Corporation, which assigned the same to petitioner.7

On August 19, 2000, petitioner complained in a letter 8 addressed to "MR. ALLAN J. CLARKE, International
Environmental Universality, Inc. x x x" that the hangar space was being used "for trucks and equipment, vehicles
maintenance and fabrication," instead of for "company helicopter/aircraft" only, and thereby threatened to cancel
the MOA if the "welding, grinding, and fabrication jobs" were not stopped immediately. 9

On January 16, 2001, petitioner sent another letter 10 to "MR. ALLAN J. CLARKE, International
Environmental Universality, Inc. x x x," reiterating that the hangar space "must be for aircraft use only," and that
he will terminate the MOA due to the safety of the aircrafts parked nearby. He further offered a vacant space
along the airport road that was available and suitable for Capt. Clarke's operations. 11

On July 19, 2002, petitioner sent a third letter,12 this time, addressed to "MR. ALLAN JOSEPH CLARKE, CEO, New
International Environmental University, Inc. x x x," demanding that the latter vacate the premises due to the
damage caused by an Isuzu van driven by its employee to the left wing of an aircraft parked inside the hangar
space, which Capt. Clarke had supposedly promised to buy, but did not. 13

On July 23, 2002, petitioner sent a final letter14 addressed to "MR. ALLAN J. CLARKE, Chairman, CEO, New
International Environmental University, Inc. x x x," strongly demanding the latter to immediately vacate the hangar
Page 230 of 343
space. He further informed Capt. Clarke that the company will "apply for immediate electrical disconnection with
the Davao Light and Power Company (DLPC)[,] so as to compel [the latter] to desist from continuing with [the]
works" thereon.15

On September 4, 2002, respondent New International Environmental Universality, Inc.16 (respondent) filed a
complaint17 against petitioner for breach of contract before the RTC, docketed as Civil Case No. 29, 292-
2002,18 claiming that: (a) petitioner had disconnected its electric and telephone lines; ( b) upon petitioner's
instruction, security guards prevented its employees from entering the leased premises by blocking the hangar
space with barbed wire; and (c) petitioner violated the terms of the MOA when he took over the hangar space
without giving respondent the requisite six (6)-month advance notice of termination.19

In his defense, petitioner alleged, among others, that: (a) respondent had no cause of action against him as the
MOA was executed between him and Capt. Clarke in the latter's personal capacity; (b) there was no need to wait
for the expiration of the MOA because Capt. Clarke performed highly risky works in the leased premises that
endangered other aircrafts within the vicinity; and (c) the six (6)-month advance notice of termination was already
given in the letters he sent to Capt. Clarke. 20

On March 25, 2003, the RTC issued a Writ of Preliminary Injunction 21 ordering petitioner to: (a) immediately
remove all his aircrafts parked within the leased premises; ( b) allow entry of respondent by removing the steel
gate installed thereat; and (c) desist and refrain from committing further acts of dispossession and/or interference
in respondent's occupation of the hangar space.

For failure of petitioner to comply with the foregoing writ, respondent filed on October 24, 2003 a petition for
indirect contempt22 before the RTC, docketed as Civil Case No. 30,030-2003, which was tried jointly with Civil
Case No. 29, 292-2002.23

The RTC Ruling

After due trial, the RTC rendered a Decision 24 dated May 19, 2006 finding petioner: (a) guilty of indirect
contempt for contumaciously disregarding its Order25 dated March 6, 2003, by not allowing respondent to
possess occupy the leased premises pending final decision in the main case; and (b) liable for breach of
contract for illegally terminating the MOA even before the expiration of the term thereof. 26 He was, thus, ordered
to pay a fine of P5,000.00, and to pay respondent nominal damages of P100,000.00 and attorney's fees of
P50,000.00 with legal interest, and costs of suit.27

On the challenge to respondent's juridical personality, the RTC quoted the Order 28 dated April 11, 2005 of the SEC
explaining that respondent was issued a Certificate of Incorporation on September 3, 2001 as New International
Environmental Universality, Inc. but that, subsequently, when it amended its Articles of Incorporation on
November 14, 2001 and July 11, 2002, the SEC Extension Office in Davao City erroneously used the name New
International Environmental University, Inc.29 The latter name was used by respondent when it filed its amended
complaint on September 11, 2002 and the petition for indirect contempt against petitioner on October 24, 2003
believing that it was allowed to do so, as it was only on April 11, 2005 when the SEC directed it to revert to its
correct name.30

The RTC further declared that the MOA, which was "made and executed by and between CAPT. [PRISCILO] B.
PAZ, Officer-In-Charge of Aircraft Hangar at Davao International Airport, Davao City, Philippines, hereinafter
called as FIRST PARTY [a]nd CAPT. ALLAN J. CLARKE[,] President of INTERNATIONAL ENVIRONMENTAL
UNIVERSITY with office address at LIBERTY AVIATION HANGAR, Davao International Airport, Davao City,
Philippines, hereinafter called as SECOND PARTY,"31 was executed by the parties not only in their personal
capacities but also in representation of their respective corporations or entities. 32

On the issue of the violation of the terms of the MOA, the RTC found respondent to have been effectively
evicted from the leased premises between July and August of 2002, or long before the expiration of the term
thereof in 2004, when petitioner: (a) placed a gate/fence that prevented ingress to and egress from the leased
premises; (b) parked a plane inside and outside the leased premises; (c) disconnected the electrical and telephone

Page 231 of 343

connections of respondent; and (d) locked respondent's employees out.33 Despite the service of the injunctive
writ upon petitioner, respondent was not allowed to possess and occupy the leased premises, as in fact, the trial
court even had to order on March 8, 2004 the inventory of the items locked inside the bodega of said premises
that was kept off-limits to respondent. Hence, petitioner was declared guilty of indirect contempt. 34

Aggrieved, petitioner elevated his case on appeal before the CA, arguing that the trial court should have
dismissed outright the cases against him for failure of respondent to satisfy the essential requisites of being a
party to an action, i.e., legal personality, legal capacity to sue or be sued, and real interest in the subject matter of
the action.35

The CA Ruling

Finding that the errors ascribed by petitioner to the trial court only touched the civil action for breach of contract,
the appellate court resolved the appeal against him in a Decision36 dated January 31, 2012, and affirmed the RTC's
finding of petitioner's liability for breach of contract. 37

The CA ruled that, while there was no corporate entity at the time of the execution of the MOA on March 1, 2000
when Capt. Clarke signed as "President of International Environmental University," petitioner is
nonetheless estopped from denying that he had contracted with respondent as a corporation, having recognized
the latter as the "Second Party" in the MOA that "will use the hangar space exclusively
for company aircraft/helicopter."38 Petitioner was likewise found to have issued checks to respondent from May 3,
2000 to October 13, 2000, which belied his claim of contracting with Capt. Clarke in the latter's personal
capacity.39

Petitioner moved for the reconsideration40 of the foregoing Decision, raising as an additional issue the death 41 of
Capt. Clarke which allegedly warranted the dismissal of the case. 42 However, the motion was denied in a
Resolution43 dated October 2, 2012 where the CA held that Capt. Clarke was merely an agent of respondent, who
is the real party in the case. Thus, Capt. Clarke's death extinguished only the agency between him and
respondent, not the appeal against petitioner. 44

Undaunted, petitioner is now before the Court via the instant petition,45 claiming that: (a) the CA erred in not
settling his appeal for both the breach of contract and indirect contempt cases in a single proceeding and,
consequently, the review of said cases before the Court should be consolidated,46 and (b) the CA should have
dismissed the cases against him for (1) lack of jurisdiction of the trial court in view of the failure to implead Capt.
Clarke as an indispensable party;47 (2) lack of legal capacity and personality on the part of respondent;48 and (3)
lack of factual and legal bases for the assailed RTC Decision. 49

The Court's Ruling

The petition lacks merit.

First, on the matter of the consolidation 50 of the instant case with G.R. No. 202826 entitled " Priscilo B. Paz v. New
International Environmental University,'' the petition for review of the portion of the RTC Decision finding
petitioner guilty of indirect contempt,51 the Court had earlier denied said motion in a Resolution 52 dated July 24,
2013 on the ground that G.R. No. 202826 had already been denied 53 with finality.54 Thus, any further elucidation
on the issue would be a mere superfluity.

Second, whether or not Capt. Clarke should have been impleaded as an indispensable party was correctly
resolved by the CA which held that the former was merely an agent of respondent. 55 While Capt. Clarke's name
and signature appeared on the MOA, his participation was, nonetheless, limited to being a representative of
respondent. As a mere representative, Capt. Clarke acquired no rights whatsoever, nor did he incur any liabilities,
arising from the contract between petitioner and respondent. Therefore, he was not an indispensable party to the
case at bar.56

It should be emphasized, as it has been time and again, that this Court is not a trier of facts, and is thus not duty-
bound to analyze again and weigh the evidence introduced in and considered by the tribunals. 57When supported
Page 232 of 343
by substantial evidence, the findings of fact by the CA are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the exceptions, 58 none of which was established
herein.

The CA had correctly pointed out that, from the very language itself of the MOA entered into by petitioner
whereby he obligated himself to allow the use of the hangar space "for company aircraft/helicopter," petitioner
cannot deny that he contracted with respondent. 59 Petitioner further acknowledged this fact in his final letter
dated July 23, 2002, where he reiterated and strongly demanded the former to immediately vacate the hangar
space his "company is occupying/utilizing."60

Section 2161 of the Corporation Code62 explicitly provides that one who assumes an obligation to an ostensible
corporation, as such, cannot resist performance thereof on the ground that there was in fact no corporation.
Clearly, petitioner is bound by his obligation under the MOA not only on estoppel but by express provision of
law. As aptly raised by respondent in its Comment 63 to the instant petition, it is futile to insist that petitioner
issued the receipts for rental payments in respondent's name and not with Capt. Clarke's, whom petitioner
allegedly contracted in the latter's personal capacity, only because it was upon the instruction of an
employee.64 Indeed, it is disputably presumed that a person takes ordinary care of his concerns, 65 and that all
private transactions have been fair and regular. 66 Hence, it is assumed that petitioner, who is a pilot, knew what
he was doing with respect to his business with respondent.

Petitioner's pleadings, however, abound with clear indications of a business relationship gone sour. In his third
letter dated July 19, 2002, petitioner lamented the fact that Capt. Clarke's alleged promise to buy an aircraft had
not materialized.67 He likewise insinuated that Capt. Clarke's real motive in staying in the leased premises was the
acquisition of petitioner's right to possess and use the hangar space. 68 Be that as it may, it is settled that courts
have no power to relieve parties from obligations they voluntarily assumed, simply because their contracts turn
out to be disastrous deals or unwise investments. 69

The lower courts, therefore, did not err in finding petitioner liable for breach of contract for effectively evicting
respondent from the leased premises even before the expiration of the term of the lease. The Court reiterates
with approval the ratiocination of the RTC that, if it were true that respondent was violating the terms and
conditions of the lease, "[petitioner] should have gone to court to make the [former] refrain from its 'illegal'
activities or seek rescission of the [MOA], rather than taking the law into his own hands." 70

WHEREFORE, the petition is DENIED. The Decision dated January 31, 2012 and the Resolution dated October 2,
2012 of the Court of Appeals in CA-G.R. CV No. 00903-MIN are hereby AFFIRMED.

SO ORDERED.

G.R. No. 193791 August 6, 2014

PRIMANILA PLANS, INC., herein REPRESENTED by EDUARDO S. MADRID, Petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, Respondent.

DECISION

REYES, J.:

This resolves the Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court filed by Primanila Plans,
Inc. (Primanila) to assail the Decision2 dated March 9, 2010 and Resolution 3 dated September 15, 2010 of the Court
of Appeals (CA) in CA-G.R. SP No. 104083. The CA affirmed in CA-G.R. SP No. 104083 the Securities and Exchange
Commission's (SEC) issuance of an Order4 dated April 9, 2008, which was a cease and desist order upon Primanila
with the following dispositive portion:

Page 233 of 343

WHEREFORE, pursuant to the authority vested in the Commission, PRIMANILA PLANS, INC., its respective officers,
directors, agents, representatives, and any and all persons, conduit entities and subsidiaries claiming and acting
under their authority, are hereby ordered to immediately CEASE AND DESIST from further engaging in activities
of selling, offering for sale Primasa plans and to refrain from further collecting payments and amortizations for
Primasa plans to protect the interest of investors and the public in general.

In accordance with the provisions of Section 64.3 of Republic Act No. 8799, otherwise known as the Securities
Regulation Code, the parties subject of this Cease and Desist Order may file a formal request or motion for the
lifting of this Order within a non-extendible period of five (5) days from receipt hereof.

SO ORDERED.5

The Facts

Primanila was registered with the SEC on October 17, 1988 and was issued Certificate of Registration No. 156350.
Based on its amended articles of incorporation, the company’s primary purpose was "to organize, establish,
develop, conduct,provide, maintain, operate, offer, issue, market and sell pension plans under which the savings
of professionals, officers, directors and other personnel of corporations, firms, or entities, and self employed
individuals can be pooled together, accumulated and invested in profitable placements and productive
enterprises so as to build an Accumulated Fund for each individual participant or planholder for his retirement,
monthly pension or for other [foreseeable] needs in the future." Primanila then operated as a pre-needcompany
and maintained a business office in Makati City. 6

On April 9, 2008, the SEC was prompted to issue the subject cease and desist order after an investigation
conducted by the SEC’s Compliance and Enforcement Department (CED) on Primanila yielded the following
factual findings duly explained inthe cease and desist order:

1. The office of [Primanila] located at 20th Floor, Philippine AXA Life Centre, Sen. Gil Puyat Ave., Makati
City was closed. No notices were posted outside said office to inform the public of the reason for such
closure. x x x

2. [Primanila]’s website (www.primanila.com) was offering a pension plan product called Primasa Plan.
The website contains detailed instructions as to how interested persons can apply for the said plan and
where initial contributions and succeeding installment payments can be made by applicants and
planholders. According to the website, applicants and planholders can pay directly at the head office, any
of its field offices or may deposit the payments in PRIMANILA’s METROBANK Account No. 066-3-
06631031-1. This was discovered by [CED] when a member of CED visited [Primanila’s] website on
February 12, 2008.

3. [PRIMANILA] failed to renew its Dealer’s License for 2008. In view of the expiration of the said license,
the [SEC’s NonTraditional Securities and Instruments Department (NTD)], through its Acting Director Jose
P. Aquino, issued a letter dated January 3, 2008 addressed to [Primanila’s] Chairmanand CEO Mr.
Eduardo S. Madrid, enjoining [Primanila] from selling and/or offering for sale pre-need plans to the
public.

4. [Primanila] has not been issued a secondary license to act as dealer or general agent for pre-need
pension plans for 2008. Also, no registration statement has been filed by [Primanila] for the approval of a
pension plan product called Primasa Plan. This is shown in the certification dated February 15, 2008
issued by NTD upon the request of Atty. Hubert B. Guevara of CED.

5. [Primanila’s] Bank Account is still active. This was discovered by CED when it deposited on March
6,2008 the sum of Php 50.00 which was duly received by METROBANK Robinson’s Branch as shown by
the deposit slip.

Page 234 of 343

 6. Among the many planholders of [PRIMANILA] are enlisted personnel of the Philippine National Police
(PNP). Premium collections for Primaplans via salary deductions were religiously remitted to [Primanila]
on a monthly basis. x x x

7. PNP remitted the total amount of Php 2,072,149.38 to respondent PRIMANILA representing the
aforementioned premium collections via salary deductions of the 410 enlisted personnel of PNP who are
planholders. This is shown in the table prepared by the remittance clerk of the PNP, Ms. Mercedita A.
Almeda.

8. [PRIMANILA] failed to deposit the required monthly contributions to the trust fund in violation of Pre-
need Rule 19.1. This is shown in the Trust Fund Reports for the monthsof November and December 2007
prepared by ASIATRUST BANK, the trustee of [Primanila].

9. [PRIMANILA] under-declared the total amount of its collections as shown in its SEC Monthly Collection
Reports which it submitted to NTD. Its reports show thatit only collected the total amount of Php
302,081.00 from January to September 2007. However, the remittance report of the PNP shows that
[Primanila] received the amount of Php 1,688,965.22 from the PNP planholders alone for the said period.
Therefore, it under-declared its report by Php 1,386,884.22.7

From these findings, the SEC declared that Primanila committed a flagrant violation of Republic Act No. 8799,
otherwise known as The Securities Regulation Code (SRC), particularly Section 16 thereof which reads:

Section 16. Pre-Need Plans. –No person shall sell or offer for sale to the public any pre-need planexcept in
accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of
pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in
the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines,
providing for uniform accounting system, reports and record keeping with respect to such plans, imposing
capital, bonding and other financial responsibility and establishing trust funds for the payment of benefits under
such plans.

It also breached the New Rules on the Registration and Sale of Pre-Need Plans, specifically Rule Nos. 3 and 15
thereof, to wit:

Rule 3. Registration of Pre-Need Plans. – No corporation shall issue, offer for sale, or sell Pre-NeedPlans unless
such plans shall have been registered under Rule 4.

Rule 15. Registration of Dealers, General Agents and Salesmen of Pre-Need Plans.

15.1. Any issuer selling its own Pre-Need Plans shall be deemed a dealer in securities and shall be required to be
registered as such and comply with all the provisions hereof; provided that the issuer selling different types of
Pre-Need Plans shall be required to be registered as dealer only once for the different types of plans.

The SEC then issued the subject cease and desist order "in order to prevent further violations and in order to
protect the interest of its plan holders and the public." 8

Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift Cease and Desist Order, 9 arguing that it was
denied due process as the order was released without any prior issuance by the SEC of a notice or formal charge
that could have allowed the company to defend itself. 10 Primanila further argued that it was neither selling nor
collecting premium payments for the product Primasa plans. The product was previously developed but was
never launched and soldto the public following the resignation from the company in 2006 by Benjamin
Munda,the one who crafted it. The Primanila company website that included details on the Primasa product was
not updated; the advertisement of the product on the website was the result of mere inadvertence. 11 Thus, the
cease and desist order against Primanila would allegedly not accomplish anything, but only prejudice the interest
and claims of its other planholders.12

Page 235 of 343

On June 5, 2008, the SEC issued its Order13 denying Primanila’s motion for reconsideration for lack of merit. The
cease and desist order issued on April 9, 2008 was then made permanent. Unyielding, Primanila appealed to the
CA viaa petition for review. On March 9, 2010, the CA rendered its decision dismissing the petition and affirming
in toto the issuances of the SEC.

The Present Petition

Following the CA’s denial of its motion to reconsider, Primanila filed the present petition which cites the following
grounds:

THE [CA] GROSSLY ERRED WHEN IT SUSTAINED THE ASSAILED ORDERS OF RESPONDENT SEC CONSIDERING
THAT THE FACTS AND EVIDENCE ON RECORD [STATE] OTHERWISE; THE [CA] GROSSLY ERRED WHEN IT RULED
THAT [PRIMANILA] WAS GIVEN DUE PROCESS BY RESPONDENT SEC AS [PRIMANILA] WAS ABLE TO FILE A
MOTION FOR RECONSIDERATION; AND

THE [CA] GROSSLY ERRED WHEN IT RULED THAT THE PUBLIC WILL NOT SUFFER GREATLY AND IRREPARABLY
BY THE IMPLEMENTATION OF THE ASSAILED ORDERS OF RESPONDENT SEC.14

The Ruling of the Court

The petition lacks merit.

Due Process of Law

Contrary to its stance, Primanila was accorded due process notwithstanding the SEC’s immediate issuance of the
cease and desist order on April 9, 2008. The authority of the SEC and the manner by which it can issue cease and
desist orders are providedin Section 64 of the SRC, and we quote:

Section 64. Cease and Desist Order. –

64.1. The Commission, after proper investigation or verification, motu proprio,or upon verified complaint by any
aggrieved party, may issue a cease and desist order without the necessity of a prior hearingif in its judgment the
act orpractice, unless restrained, will operate as a fraud on investors or isotherwise likely to cause grave or
irreparable injury or prejudice to the investing public.

64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been initiated or that
a complaint has been filed, including the contents of the complaint, shall be confidential. Upon issuance of a
cease and desist order,the Commission shall make public such order and a copy thereof shall be immediately
furnished to each person subject to the order. 64.3. Any person against whom a cease and desist order was
issued may, within five (5) days from receipt of the order, file a formal request for lifting thereof. Said request shall
be set for hearing by the Commission not later than fifteen (15) days from its filing and the resolution thereof shall
be made not later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the
request within the time herein prescribed, the cease and desist order shall automatically be lifted.

The law is clear on the point that a cease and desist order may be issued by the SEC motu proprio, it being
unnecessary thatit results from a verified complaint from an aggrieved party. A prior hearing is also not required
whenever the Commission finds it appropriate to issue a cease and desist order that aims to curtail fraudor grave
or irreparable injury to investors. There is good reason for this provision, as any delay in the restraint of acts that
yield such resultscan only generate further injury to the public that the SEC is obliged to protect.

To equally protect individuals and corporations from baseless and improvident issuances, the authority of the SEC
under this rule is nonetheless with defined limits. A cease and desist order may only be issued by the Commission
after proper investigation or verification, and upon showing that the acts sought to be restrained could result in
injury or fraud to the investing public. Without doubt, these requisites were duly satisfied by the SEC prior to its
issuance of the subject cease and desist order.
Page 236 of 343
Records indicate the prior conduct of a proper investigation on Primanila’s activities by the Commission’s CED.
Investigators of the CED personally conducted an ocular inspection of Primanila’s declared office, only to confirm
reports that it had closed even without the prior approval of the SEC. Members of CED also visited the company
website of Primanila, and discovered the company’s offer for sale thereon of the pension plan product called
Primasa Plan, with instructions on how interested applicants and planholders could pay their premium payments
for the plan. One of the payment options was through bank deposit to Primanila’s given Metrobank account
which, following an actual deposit made by the CED was confirmed to be active.

As part of their investigation, the SEC also looked into records relevant to Primanila’s business. Records with the
SEC’s Non-Traditional Securities and Instruments Department (NTD) disclosed Primanila’s failure to renew its
dealer’s license for 2008, orto apply for a secondary license as dealer or general agent for pre-need pension
plans for the same year. SEC records also confirmed Primanila’s failureto file a registration statement for Primasa
Plan, to fully remit premium collections from planholders, and to declare truthfully its premium collections from
January to September 2007. (Emphasis ours)

The SEC was not mandated to allow Primanila to participate in the investigation conducted by the Commission
prior to the cease and desist order’s issuance. Given the circumstances, it was sufficient for the satisfaction of the
demands of due process that the company was amply apprised of the results of the SEC investigation, and then
given the reasonable opportunity to present its defense. Primanila was able to do this via its motion to reconsider
and lift the cease and desist order. After the CED filed its comment on the motion,Primanila was further given the
chance to explain its side to the SEC through the filing of its reply. "Trite to state, a formal trial or hearing isnot
necessary to comply with the requirements of due process.Its essence is simply the opportunity to explain one’s
position."15 As the Court held in Ledesma v. Court of Appeals: 16

Due process, as a constitutional precept, does not always and in all situations require a trial-type proceeding. Due
process is satisfied when a person is notified of the charge against him and given an opportunity to explain or
defend himself. In administrative proceedings, the filing of charges and giving reasonable opportunity for the
person so charged to answer the accusations against him constitute the minimum requirements of due process.
The essence of due process is simply to be heard, or as applied to administrative proceedings, an opportunity to
explain one’s side, or an opportunity to seek a reconsideration of the action or ruling complained of. 17

Validity of the Cease and Desist Order

The validity of the SEC’s cease and desist order is further sustained for having sufficient factual and legal bases.

The acts specifically restrained by the subject cease and desist order were Primanila’s sale, offer for sale and
collection of payments specifically for its Primasa plans. Notwithstandingthe findings of both the SEC and the CA
on Primanila’s activities, the company still argued in its petition that it neither sold nor collected premiums for the
Primasa product. Primanila argued that the offer for sale of Primasa through the Primanila website was the result
of mere inadvertence, after the website developer whom it hired got hold of a copy of an old Primasa brochure
and then included its contents in the company website even without the knowledge and prior approval of
Primanila.

It bears emphasis that the arguments of Primanila on the matter present factual issues, which as a rule, are
beyond the scope of a petition for review on certiorari. We underscore the basic rule that only questions of law
may be raised in a petition for review under Rule 45 of the Rules of Court. The Supreme Court is not a trier of
facts. It is not our function to review, examine and evaluate or weigh the probative value of the evidence
presented, for a question of fact would arise in such event. 18 Thus, it is equally settled that the factual findingsof
administrative agencies, such as the SEC, are generally held to be binding and final so long as they are supported
by substantial evidence in the record of the case. Our jurisdiction is limited to reviewing and revising errorsof law
imputed to the lower court, the latter’s findings of fact being conclusive and not reviewable by this Court. 19

In ruling on the petition’s denial, werely on the substantial evidence that supports the SEC’s and CA’s
findings.1âwphi1Section 5, Rule 133 of the Rules of Court defines "substantial evidence" as such relevant evidence
which a reasonable mind might accept as adequate to support a conclusion. 20 In the instant case, this substantial
Page 237 of 343
evidence is derived from the results of the SEC investigation on Primanila’s activities. Specifically on the product
Primasa plans, the SEC ascertained that there were detailed instructions on Primanila’s website as to how
interested persons could apply for a plan, together with the manner by which premium payments therefor could
be effected. A money deposit by CED to Primanila’s Metrobank account indicated in the advertisement confirmed
that the bank account was active.

There could be no better conclusion from the foregoing circumstances that Primanila was engaged inthe sale or,
at the very least, an offer for sale to the public of the Primasa plans. The offer for Primasa was direct and its reach
was even expansive, especially as it utilized its website as a medium and visits to it were, as could be expected,
from prospective clients.

The Court finds weak and implausible the argument of Primanila that the inclusion of the Primasa advertisement
on its website was due to mere inadvertence. It was very unlikely that Primanila’s website developer would
include in the Primanila website sections or items that were not sanctioned by the company. As a hiree of the
company, the websitedeveloper could have only acted upon the orders and specific instructions of the company.
As prudence requires, there also normally are employees of a company who are specifically tasked to monitor
contents and activities in its company website. It was therefore inconceivable that Primanila only knew of the
Primasa post on its website after it received the subject cease and desist order. In any case, Primanila should
beheld responsible for the truthfulness of all data or information that appeared on its website, especially as these
were supplied by persons who wereworking under its authority.

It is beyond dispute that Primasa plans were not registered with the SEC. Primanila was then barred from selling
and offering for sale the said plan product. A continued sale by the company would operate as fraud to its
investors, and would cause grave or irreparable injury or prejudice to the investing public, grounds which could
justify the issuance of a cease and desist order under Section 64 of the SRC.Furthermore, even prior to the
issuance of the subject cease and desist order, Primanila was already enjoined by the SEC from selling and/or
offering for sale pre-need products to the public. The SEC Order dated April 9, 2008 declared that Primanila
failed to renew its dealer’s license for 2008, prompting the SEC’s NTD to issue a letter dated January3, 2008
addressed to Primanila’s Chairman and Chief Executive Officer Eduardo S. Madrid, enjoining the company from
selling and/or offering for sale pre-need plans to the public. It also had not obtained a secondary license to act as
dealer or general agent for pre-need pension plans for 2008.21

In view of the foregoing, Primanila clearly violated Section 16 of the SRC and pertinent rules which barred the sale
or offer for sale to the public of a pre-need product except in accordance with SEC rules and regulations. Under
Section 16 of the SRC:

Sec. 16. Pre-Need Plans. - No person shall sell or offer for sale to the public any pre-need plan except in
accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of
pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in
the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines,
providing for uniform plans, imposing capital, bonding and other financial responsibility, and establishing trust
funds for the payment of benefits under such plans.

As the foregoing provisions are necessary for the protection of investors and the public in general, even the Pre-
Need Code,22 which now governs pre-need companies and their activities, contains similar conditions for the
regulation of pre-need plans.

WHEREFORE, the petition is DENIED. The Decision dated March 9, 2010 and Resolution dated September 15, 2010
of the Court of Appeals in CA-G.R. SP. No. 104083 are AFFIRMED. SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

G.R. No. 187702 October 22, 2014

Page 238 of 343

SECURITIES AND EXCHANGE COMMISSION, Petitioner,
vs.
THE HONORABLE COURT OF APPEALS, OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING
TIA, Respondents.

x-----------------------x

G.R. No. 189014

ASTRA SECURITIES CORPORATION, Petitioner,

vs.
OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA, Respondents.

DECISION

SERENO, CJ:

G.R. No. 187702 is a Petition for Certiorari under Rule 65 of the Rules of Court seeking to nullify the Court of
Appeals (CA) Decision1 dated 18 March 2009 in CA-G.R. SP No. 106006. G.R. No. 189014 is a Petition for Review on
Certiorari under Rule 45 of the Rules of Court assailing the same Decision, as well as the CA Resolution 2 dated 9
July 2009. On 12 October 2009, the Court resolved to consolidate the two cases.3

The CA Decision ruled that because controversies involving the validation of proxies are considered election
contests under the Interim Rules of Procedure Governing Intra-Corporate Controversies, they are properly
cognizable by the regular courts, not by the Securities and Exchange Commission. The CA Resolution denied the
motion for reconsideration filed by Astra Securities Corporation.

FACTS

Omico Corporation (Omico) is a company whose shares of stock arelisted and traded in the Philippine Stock
Exchange, Inc.4 Astra Securities Corporation (Astra) is one of the stockholders of Omico owning about 18% of the
latter’s outstanding capital stock.5

Omico scheduled its annual stockholders’ meeting on 3 November 2008.6 It set the deadline for submission of
proxies on 23 October 2008 and the validation of proxies on 25 October 2008. Astra objected to the validation of
the proxies issued in favor of Tommy Kin Hing Tia (Tia), representing about 38% of the outstanding capital stock
of Omico.7 Astra also objected to the inclusion of the proxies issued in favor of Tia and/or Martin Buncio,
representing about 2% of the outstanding capital stock of Omico. 8

Astra maintained that the proxy issuers, who were brokers, did not obtain the required express written
authorization of their clients when they issued the proxies in favor of Tia. In so doing, the issuers were allegedly in
violation of SRC Rule 20(11)(b)(xviii)9 of the Amended Securities Regulation Code (SRC or Republic Act No. 8799)
Rules.10Furthermore, the proxies issued in favor of Tia exceeded 19, thereby giving rise to the presumption of
solicitation thereof under SRC Rule 20(2)(B)(ii)(b) 11 of the Amended SRC Rules. Tia did not comply with the rules
on proxy solicitation, in violation of Section 20.1 12 of the SRC.

Despite the objections of Astra, Omico’s Board of Inspectors declared that the proxies issued in favor of Tia were
valid.13

On 27 October 2008, Astra filed a Complaint14 before the Securities and Exchange Commission (SEC) praying for
the invalidation of the proxies issued in favor of Tia. Astra also prayed for the issuance of a cease and desist order
(CDO) enjoining the holding of Omico’s annual stockholders’ meeting until the SEC had resolved the issues
pertaining to the validation of proxies.

Page 239 of 343

On 30 October 2008, SEC issuedthe CDO enjoining Omico from accepting and including the questioned proxies
in determining a quorum and in electing the members of the board of directors during the annual stockholders’
meeting on 3 November 2008.15

Attempts to serve the CDO on 3 November 2008 failed, and the stockholders’ meeting proceeded as scheduled
with 52.3% of the outstanding capital stock of Omico present in person or by proxy. 16 The nominees for the board
of directors were elected upon motion.17

Astra instituted before the SEC a Complaint 18 for indirect contempt against Omico for disobedience of the CDO.
On the other hand, Omico filed before the CA a Petition for Certiorari and Prohibition 19 imputing grave abuse of
discretion on the part of the SEC for issuing the CDO.

RULING OF THE CA

In the assailed Decision dated 18March 2009, the CA declared the CDO null and void. 20

The CA held that the controversy was an intra-corporate dispute.21 The SRC expressly transferred the jurisdiction
over actions involving intracorporate controversies from the SEC to the regional trial courts. 22 Furthermore,
Section 2, Rule 623 of the Interim Rules of Procedure Governing Intra-Corporate Disputes,24 provides that any
controversy or dispute involving the validation of proxies is an election contest, the jurisdiction over which has
also been transferred by the SRC to the regular courts. 25

Thus, according to the CA, the SEC committed grave abuse of discretion in taking cognizance of Astra’s
complaint.26 The CDO was a patent nullity, for an order issued without jurisdiction is no order at all.

Aggrieved by the CA Decision, the SEC filed before us the instant Petition for Certiorari docketed as G.R. No.
187702.27 Meanwhile, Astra filed a Motion for Reconsideration before the CA, 28 which subsequently denied the
motion in the assailed Resolution dated 9 July 2009. On 14 September 2009, Astra filed the instant Petition for
Review on Certiorari docketed as G.R. No. 189014.29 The Court consolidated the two petitions on 12 October
2009.30

ISSUE

Whether the SEC has jurisdiction over controversies arising from the validation of proxies for the election of the
directors of a corporation.

OUR RULING

About a month after the CA issued the assailed Decision, this Court promulgated GSIS v. CA, 31 which squarely
answered the above issue in the negative.

In that case, we observed that Section 6 32 (g) of Presidential Decree No. (P.D.) 902-A dated 11 March 1976
conferred on SEC the power "[t]o pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent stockholders ormembers." Section 6, however, opens thus: "In order to effectively exercise
such jurisdiction x x x." This opening clearly refers to the preceding Section 5.33 The Court pointed out therein that
the power to pass upon the validity of proxies was merely incidental or ancillary to the powers conferred on the
SEC under Section 5 of the same decree. With the passage of the SRC, the powers granted to SEC under Section
5 were withdrawn, together withthe incidental and ancillary powers enumerated in Section 6.

While the regular courts now had the power to hear and decide cases involving controversies in the election of
directors, it was not clear whether the SRC also transferred to these courtsthe incidental and ancillary powers of
the SEC as enumerated in Section 6 of P.D. 902-A. Thus, in GSIS v. CA, it was necessary for the Court to determine
whether the action to invalidate the proxies was intimately tied to an election controversy. Hence, the Court
pronounced:

Page 240 of 343

Under Section 5(c) of PresidentialDecree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial
courts with respect to election related controversies is specifically confined to "controversies in the election or
appointment of directors, trustees, officers or managers of corporations, partnerships, or associations." Evidently,
the jurisdiction of the regular courts over so-called election contests or controversies under Section 5 (c) does not
extend toevery potential subject that may be voted on by shareholders, but only to the election of directors or
trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code.

This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate
proxy solicitation, and the statutory jurisdiction of regularcourts over election contests or controversies. The
power of the SEC toinvestigate violations of its rules on proxy solicitation is unquestioned whenproxies are
obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-
A. However, when proxies are solicited in relation to the election of corporate directors, the resulting controversy,
even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an
election controversy within the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the
SRC in relation to Section 5 (c) of Presidential Decree No. 902-A.

The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the election
of corporate directors must be seen as intended to confine to one body the adjudication of all related claims and
controversy arising from the election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the
Interim Rules broadly defines the term "election contest" as encompassing all plausible incidents arising from the
election ofcorporate directors, including: (1) any controversy or dispute involving title or claim to any elective
office in a stock or nonstock corporation, (2) the validation of proxies, (3) the manner and validity of elections and
(4) the qualifications of candidates, including the proclamation of winners. If all matters anteceding the holding of
such election which affectits manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing jurisdictions
between that body and the regular courts becomes frighteningly real. From the languageof Section 5 (c) of
Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for election to the board of directors are properly cognizable and
adjudicable by the regular courts exercising original and exclusive jurisdiction over election cases. 34 x x x.

The ruling harmonizes the seeming conflict between the Amended SRC Rules promulgated by the SEC and the
Interim Rules of Procedure Governing Intra-Corporate Disputes promulgated by the Court.

SRC Rule 20(11)(b)(xxi) of the Amended SRC Rules provides:

SRC RULE 20.

Disclosures to Stockholders Prior to Meeting

(formerly, SRC Rule 20 – The Proxy Rule)

xxxx

11. Other Procedural Requirements

xxxx

b. Proxy

xxxx

xxi. In the validation of proxies, a special committee of inspectors shall be designated or appointed by the Board
of Directors which shall be empoweredto pass on the validity of proxies. Any dispute that may arise pertaining
thereto, shall be resolved by the Securities and Exchange Commission upon formal complaint filed by the
aggrieved party, or by the SEC officer supervising the proxy validation process. (Emphasis supplied)
Page 241 of 343
On the other hand, these are the provisions of Section 1, Rule 1; and Section 2, Rule 6 of the Interim Rules of
Procedure Governing IntraCorporate Disputes:

RULE 1
General Provisions

SECTION 1. (a) Cases Covered– These Rules shall govern the procedure to be observed in civil cases involving the
following:

a) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or
partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation, partnership, or association;

b) Controversies arising out of intra-corporate, partnership, or association relations, between and among
stockholders, members, or associates; and between, any or all of them and the corporation, partnership,
or association of which they are stockholders, members, or associates, respectively;

c) Controversies in the election or appointment of directors, trustees, officers, or managers of

corporations, partnerships, or associations;

d) Derivative suits; and

e) Inspection of corporate books.

xxxx

RULE 6
Election Contests

xxxx

SECTION 2. Definition. – An election contest refers to any controversy or dispute involvingtitle or claim to any
elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity of elections,
and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or
other officer directly elected by the stockholders in a close corporation or by members of a non-stock
corporation where the articles of incorporation or by-laws so provide. (Emphases supplied)

The Court explained that the powerof the SEC to regulate proxies remains in place in instances when stockholders
vote on matters other than the election of directors. 35 The test is whether the controversy relates to such election.
All matters affecting the manner and conduct of the election of directors are properly cognizable by the regular
courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers it
exercises over corporations, partnerships and associations.

Astra endeavors to remove the instant case from the ambit of GSIS v. CAby arguing that 1) the validation of
proxies in this case relates to the determination of the existence of a quorum; and 2) no actual voting for the
members of the board of directors was conducted, as the directors were merely elected by motion.

Indeed, the validation of proxies in this case relates to the determination of the existence of a
quorum.1âwphi1 Nonetheless, it is a quorum for the election of the directors, and, assuch, which requires the
presence – in person or by proxy – of the owners of the majority of the outstanding capital stock of
Omico.36 Also, the fact that there was no actual voting did not make the election any less so, especially since
Astra had never denied that an election of directors took place.

We find no merit either in the proposal of Astra regarding the "two (2) viable, non-exclusive and successive legal
remedies to question the validity of proxies." 37 It suggests that the power to pass upon the validity of proxies to
Page 242 of 343
determine the existence of a quorum prior to the conduct of the stockholders’ meeting should lie with the SEC;
but, after the stockholders’ meeting, questions regarding the use of invalid proxies in the election of directors
should be cognizable by the regular courts, since there was already an election to speak of.

First, this interpretation is akin to the argument struck down by the Court in GSIS v. CA. If the Court adopts the
suggestion, "we would be perpetually confronted with the spectacle of election controversies being heard and
adjudicated by both the SEC and the regular courts, made possible through a mere allegation that the
anteceding x x x process was errant, but the competing cases [were] filed with one objective in mind - to affect
the outcome of the election of the board of directors." 38

Second, the validation of proxies serves a number of purposes, including determining the existence of a quorum
and ascertaining the authenticity of proxies to be used for the election of directors at the stockholders' meeting.
Section 2, Rule 6, of the Interim Rules of Procedure Governing Intra-Corporate Disputes provides that an election
contest covers any controversy or dispute involving the validation of proxies, in general. Thus, it can only refer to
all the beneficial purposes that validation of proxies can bring about when made in connection with a
forthcoming election of directors. Thus, there is no point in making distinctions between who has jurisdiction
before and who has jurisdiction after the election of directors, as all controversies related thereto - whether
before, during or after - shall be passed upon by regular courts as provided by law. The Court closes with an
observation.

As in the instant cases, GSIS v. CA is a consolidation of two cases, one of which was filed by a private party and
the other by the SEC itself. In both cases, the parties were aggrieved by the CA ruling, so they filed the cases
seeking a pronouncement from the Court that it recognizes the jurisdiction of the SEC over the controversy.

Calling to mind established jurisprudential principles, the Court therein ruled that quasi-judicial agencies do not
have the right to seek the review of an appellate court decision reversing any of their rulings. 39 This is because
they are not real parties-in-interest. Thus, the Court expunged the petition filed by the SEC for the latter's lack of
capacity to file the suit. So it must be in the instant cases.

WHEREFORE, the petition in G.R. No. 187702 is EXPUNGED for lack of capacity of petitioner to file the suit. 1âwphi1

The petition in G.R. No. 189014 is DENIED. The Court of Appeals Decision dated 18 March 2009 and Resolution
dated 9 July 2009 in CA-G.R. SP No. 106006 are AFFIRMED.

SO ORDERED.

MARIA LOURDES P. A. SERENO

Chief Justice, Chairperson

G.R. No. 200620, March 18, 2015

ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G. BRODETT, ENRIQUE L. LOCSIN AND
ROBERTO V. SAN JOSE, Petitioners, v. PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, REPRESENTED
BY VICTOR AFRICA, Respondent.

DECISION

VILLARAMA, JR., J.:

This case is a remnant of the multiple suits generated by the two factions battling for control of two sequestered
corporations since 2004, a controversy we already resolved with finality in 2013.

Assailed in this petition for review under Rule 45 are the Decision1 dated October 21, 2011 and Resolution2 dated
February 10, 2012 of the Court of Appeals (CA) in CA-G.R. SP No. 99789. The CA reversed the Order3 dated June
21, 2007 of the Regional Trial Court (RTC) of Makati City, Branch 149 in Civil Case No. 06-095.
Page 243 of 343
Respondent Philippine Communications Satellite Corporation (PHILCOMSAT), along with Philippine Overseas
Telecommunications Corporation (POTC) were among those private companies sequestered by the Philippine
Commission on Good Government (PCGG) after the EDSA People Power Revolution in 1986. PHILCOMSAT owns
81% of the outstanding capital stock of Philcomsat Holdings Corporation (PHC). The majority shareholders of
PHILCOMSAT are also the seven families who have owned and controlled POTC (Ilusorio, Nieto, Poblador, Africa,
Benedicto, Ponce Enrile and Elizalde).

During the administration of President Gloria Macapagal-Arroyo, Enrique L. Locsin and Manuel D. Andal, along
with Julio Jalandoni, were appointed nominee-directors representing the Republic of the Philippines through the
PCGG in the board of directors of POTC and the board of directors of PHILCOMSAT. These PCGG nominees have
aligned with the Nieto family against the group of Africa and Ilusorio (Africa-Bildner), in the ensuing battle for
control over the respective boards of POTC, PHILCOMSAT and PHC. Benito Araneta was also a nominee of PCGG
during the term of President Joseph Ejercito Estrada.

On August 31, 2004, the following were elected during the annual stockholders’ meeting of PHC conducted by
the Nieto-PCGG group: Locsin (Director and Acting Chairman); Oliverio Laperal (Director and Vice-Chairman);
Manuel H. Nieto, Jr. (Director, President and Chief Executive Officer); Philip G. Brodett (Director and Vice-
President); Andal (Director, Treasurer and Chief Financial Officer); Roberto V. San Jose (Director and Corporate
Secretary); Jalandoni, Lokin, Jr., Prudencio Somera, Roberto Abad and Benito Araneta as Directors. Said election
at PHC was the offshoot of separate elections conducted by the two factions in POTC and PHILCOMSAT, the
Africa-Bildner group and the Nieto-PCGG group.

In the July 28, 2004 stockholders’ meetings of POTC and PHILCOMSAT, Victor Africa was among those in the
Africa-Bildner group who were elected as Directors. He was designated as the POTC proxy to the PHILCOMSAT
stockholders’ meeting. While Locsin, Andal and Nieto, Jr. were also elected as Directors, they did not accept their
election as POTC and PHILCOMSAT Directors. Instead, the Nieto-PCGG group held the stockholders’ meeting for
PHILCOMSAT on August 9, 2004 at the Manila Golf Club. Immediately after the stockholders’ meeting, an
organizational meeting was held, and Nieto, Jr. and Locsin were respectively elected as Chairman and President
of PHILCOMSAT. At the same meeting, they issued a proxy in favor of Nieto, Jr. and/or Locsin authorizing them
to represent PHILCOMSAT and vote the PHILCOMSAT shares in the stockholders’ meeting of PHC scheduled on
August 31, 2004.

Thereafter, the two factions took various legal steps including the filing of suits and countersuits to gain
legitimacy for their respective election as directors and officers of POTC and PHILCOMSAT. The Africa group had
sought the invalidation of the proxy issued in favor of Nieto, Jr. and/or Locsin and consequent nullification of the
elections held during the annual stockholders’ meeting of PHC on August 31, 2004 (Civil Case No. 04-1049 of
RTC, Makati City, Branch 138). Prior to this, there was the pending case involving the compromise agreement
dated June 28, 1996 entered into by Atty. Potenciano Ilusorio with the Republic of the Philippines and the PCGG
relative to the Ilusorio family’s shareholdings in POTC, including those shares forcibly taken from him by former
President Ferdinand Marcos which were placed in the name of Independent Realty Corporation (IRC) and Mid-
Pasig Land Development (Mid-Pasig). By Decision dated June 15, 2005, this Court affirmed the validity of the said
compromise agreement in G.R. Nos. 141796 and 141804. As a result of the compromise agreement, the Ilusorio,
Africa, Poblador, Benedicto and Ponce Enrile families gained majority control (51.37%) and the Nieto family and
PCGG became the minority.

On November 17, 2005, Africa in his capacity as President and CEO of PHILCOMSAT, and as stockholder in his
own right, wrote the board and management of PHC that PHILCOMSAT will exercise its right of inspection over
the books, records, papers, etc. pertinent to the business transactions of PHC for the 3 rdquarter of 2005,
specifically the company’s financial documents.4cralawred

In his letter dated November 22, 2005, Nieto, Jr. said that Africa’s request will be referred to the PHC Board of
Directors or Executive Committee in view of the several pending cases involving the Africa and Nieto-PCGG
groups on one hand, and the PHC and its board of directors on the other. He further advised Africa to inform
them in writing of his reasons and purposes for such inspection. 5 In reply, Africa reiterated his request for

Page 244 of 343

inspection asserting that the PHILCOMSAT board of directors was elected on September 22, 2005 under
circumstances in consonance with the final decision of this Court and that there is no case against its
legitimacy.6cralawred

On the day of the scheduled inspection, PHILCOMSAT sent its representatives, Atty. Samuel Divina and Enrico
Songco. However, Brodett disallowed the conduct of the inspection which prompted PHILCOMSAT through its
counsel to make a written query whether the refusal of Brodett to permit the conduct of PHC’s inspection of
corporate books and financial documents was with the knowledge and authority of PHC’s board of directors. But
no reply or communication was received by Africa from the PHC. 7cralawred

On February 2, 2006, PHILCOMSAT filed in the RTC a Complaint 8 for Inspection of Books against the incumbent
PHC directors and/or officers, to enforce its right under Sections 74 and 75 of the Corporation Code of the
Philippines. The original defendants were Julio J. Jalandoni, Luis K. Lokin, Jr., Oliverio G. Laperal, Nieto, Jr.,
Prudencio C. Somera, and herein petitioners Andal, Locsin, Brodett, San Jose and Araneta.

In its Order dated June 21, 2007, the RTC dismissed the complaint for lack of jurisdiction. Citing Del Moral v.
Republic of the Philippines9 and Olaguer v. RTC, National Capital Judicial Region, Br. 48, Manila,10 said court ruled
that it is the Sandiganbayan which has jurisdiction considering that plaintiff is a sequestered corporation of the
Republic through the PCGG alleging a right of inspection over PHC but which right or authority was being raised
as a defense by the defendants.

PHILCOMSAT appealed to the CA thru a petition for review under Rule 43 arguing that it is the RTC and not
Sandiganbayan which has jurisdiction over the case involving a stockholder’s right to inspect corporate books
and records. Petitioners countered that the main controversy is rooted upon the issue of who are the rightful
representative and board of directors of PHILCOMSAT. Accordingly, PHILCOMSAT’s right of inspection hinges on
the resolution of the ongoing power struggle within PHILCOMSAT, specifically on the issue of who between the
Africa and Nieto-Locsin groups is the legitimate board of directors. It was further pointed out that POTC and
PHILCOMSAT were both under sequestration by the PCGG, and hence all issues and controversies arising
therefrom or related or incidental thereto fall under the exclusive and original jurisdiction of the Sandiganbayan.
Petitioners also contended that the petition should be dismissed on the ground of litis pendentia as the CA may
take judicial notice of the fact that many cases involving Africa’s purported authority to represent PHILCOMSAT
are pending before several courts, which issue must necessarily be resolved to determine who possesses the right
of inspection of PHC’s books and records.

Finding merit in petitioners’ arguments, the CA granted the petition, as follows:chanRoblesvirtualLawlibrary

WHEREFORE, the Petition is hereby GRANTED. The Order of dismissal dated 21 June 2007 of the Regional Trial
Court of Makati City, Branch 149, in Civil Case No. 06-095, is REVERSED and SET ASIDE. Accordingly, the case is
remanded to the court a quo for further proceedings. The court a quo is reminded to hear and decide the case
with dispatch.

SO ORDERED.11cralawred
cralawlawlibrary

With the denial of their motion for reconsideration, petitioners are now before this Court.

The issues submitted for our resolution are: (1) whether it is the Sandiganbayan or RTC which has jurisdiction over
a stockholders’ suit to enforce its right of inspection under Section 74 of the Corporation Code; and (2) whether
the complaint failed to state a cause of action considering that PHILCOMSAT never authorized Africa or any other
person to file the said complaint.

The petition has no merit.

Both issues presented in this case pertaining to the jurisdiction of the RTC in intra-corporate disputes within the
sequestered corporations of PCGG, and who between the contending groups held the controlling interest in

Page 245 of 343

POTC, and consequently in PHILCOMSAT and PHC, have already been resolved in the consolidated petitions
docketed as G.R. No. 184622 (Philippine Overseas Telecommunications Corp. [POTC] and Philippine
Communications Satellite Corporation [PHILCOMSAT] v. Victor Africa, et al.), G.R. Nos. 184712-14 (POTC and
PHILCOMSAT v. Hon. Jenny Lin Aldecoa-Delorino, Pairing Judge of RTC Makati City, Br. 138, et al.), G.R. No.
186066 (Philcomsat Holdings Corp., represented by Concepcion Poblador v. PHILCOMSAT, represented by Victor
Africa), and G.R. No. 186590 (Philcomsat Holdings Corp., represented by Erlinda I. Bildner v. Philcomsat Holdings
Corp., represented by Enrique L. Locsin).12cralawred

On the first issue, we ruled that it is the RTC and not the Sandiganbayan which has jurisdiction over cases which
do not involve a sequestration-related incident but an intra-corporate controversy.

Originally, Section 5 of Presidential Decree (P.D.) No. 902-A vested the original and exclusive jurisdiction over
cases involving the following in the SEC, to wit:
xxxx

(a) Devices or schemes employed by, or any acts of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or organization registered with the
Commission;ChanRoblesVirtualawlibrary

(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members or associates; between any or all of them and the corporation, partnership or association of which they
are stockholders, members or associates, respectively; and between such corporation, partnership or association
and the State insofar as it concerns their individual franchise or right as such entity;ChanRoblesVirtualawlibrary

(c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations,
partnership or associations;ChanRoblesVirtualawlibrary

(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payment in
cases where the corporation, partnership or association possesses sufficient property to cover all its debts but
foresees the impossibility of meeting them when they respective fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities but is under the management of a
Rehabilitation Receiver or Management Committee created pursuant to this Decree.
Upon the enactment of Republic Act No. 8799 (The Securities Regulation Code ), effective on August 8, 2000, the
jurisdiction of the SEC over intra-corporate controversies and the other cases enumerated in Section 5 of P.D. No.
902-A was transferred to the Regional Trial Court pursuant to Section 5.2 of the law, which provides:
5.2. The Commission’s jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902-A is
hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court; Provided, That the
Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
To implement Republic Act No. 8799, the Court promulgated its resolution of November 21, 2000 in A.M. No. 00-
11-03-SC designating certain branches of the RTC to try and decide the cases enumerated in Section 5 of P.D. No.
902-A. Among the RTCs designated as special commercial courts was the RTC (Branch 138) in Makati City, the
trial court for Civil Case No. 04-1049.

On March 13, 2001, the Court adopted and approved the Interim Rules of Procedure for Intra-Corporate
Controversies under Republic Act No. 8799 in A.M. No. 01-2-04-SC, effective on April 1, 2001, whose Section 1 and
Section 2, Rule 6 state:
Section 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and non-stock
corporations.

Section 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any

Page 246 of 343

elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections,
and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or
other officer directly elected by the stockholders in a close corporation or by members of a non-stock
corporation where the articles of incorporation or by-laws so provide. (bold underscoring supplied)
Conformably with Republic Act No. 8799, and with the ensuing resolutions of the Court on the implementation of
the transfer of jurisdiction to the Regional Trial Court, the RTC (Branch 138) in Makati had the authority to hear and
decide the election contest between the parties herein. There should be no disagreement that jurisdiction over the
subject matter of an action, being conferred by law, could neither be altered nor conveniently set aside by the
courts and the parties.

To buttress its position, however, the Nieto-Locsin Group relied on Section 2 of Executive Order No. 14, which
expressly mandated that the PCGG “shall file all such cases, whether civil or criminal, with the Sandiganbayan,
which shall have exclusive and original jurisdiction thereof.”

The reliance was unwarranted.

Section 2 of Executive Order No. 14 had no application herein simply because the subject matter involved was an
intra-corporate controversy, not any incidents arising from, incidental to, or related to any case involving assets
whose nature as ill-gotten wealth was yet to be determined. In San Miguel Corporation v. Kahn, the Court held
that:
The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court’s Resolution
of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena, et al., all cases of the
Commission regarding ‘the funds, moneys, assets, and properties illegally acquired or misappropriated by former
President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business
Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and original
jurisdiction of the Sandiganbayan,’ and all incidents arising from, incidental to, or related to, such cases
necessarily fall likewise under the Sandiganbayan’s exclusive and original jurisdiction, subject to review on
certiorari exclusively by the Supreme Court.” His complaint does not involve any property illegally acquired or
misappropriated by Marcos, et al., or “any incidents arising from, incidental to, or related to” any case involving
such property, but assets indisputably belonging to San Miguel Corporation which were, in his (de los Angeles')
view, being illicitly committed by a majority of its board of directors to answer for loans assumed by a sister
corporation, Neptunia Co., Ltd.

De los Angeles’ complaint, in fine, is confined to the issue of the validity of the assumption by the corporation of
the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and stockholders, an
issue evidently distinct from, and not even remotely requiring inquiry into the matter of whether or not the
33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which, issue,
as already pointed out, de los Angeles, in common with the PCGG, had in fact espoused the affirmative). De los
Angeles’ dispute, as stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be
sure, is of no concern to the Sandiganbayan, having no relevance whatever to the ownership of the sequestered
stock. The contention, therefore, that in view of this Court's ruling as regards the sequestered SMC stock above
adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and must be
rejected. The dispute concerns acts of the board of directors claimed to amount to fraud and misrepresentation
which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations
between and among stockholders, or between any or all of them and the corporation of which they are
stockholders.
Moreover, the jurisdiction of the Sandiganbayan has been held not to extend even to a case involving a
sequestered company notwithstanding that the majority of the members of the board of directors were PCGG
nominees. The Court marked this distinction clearly in Holiday Inn (Phils.), Inc. v. Sandiganbayan , holding thusly:
The subject-matter of petitioner’s proposed complaint-in-intervention involves basically, an interpretation of
contract, i.e., whether or not the right of first refusal could and/or should have been observed, based on the
Addendum/Agreement of July 14, 1988, which extended the terms and conditions of the original agreement of
January 1, 1976. The question of whether or not the sequestered property was lawfully acquired by Roberto S.
Benedicto has no bearing on the legality of the termination of the management contract by NRHDC’s Board of
Directors. The two are independent and unrelated issues and resolution of either may proceed independently of

Page 247 of 343

each other. Upholding the legality of Benedicto’s acquisition of the sequestered property is not a guarantee that
HIP’s management contract would be upheld, for only the Board of Directors of NRHDC is qualified to make such
a determination.

Likewise, the Sandiganbayan correctly denied jurisdiction over the proposed complaint-in-intervention. The
original and exclusive jurisdiction given to the Sandiganbayan over PCGG cases pertains to (a) cases filed by the
PCGG, pursuant to the exercise of its powers under Executive Order Nos. 1, 2 and 14, as amended by the Office of
the President, and Article XVIII, Section 26 of the Constitution, i.e., where the principal cause of action is the
recovery of ill-gotten wealth, as well as all incidents arising from, incidental to, or related to such cases and
(b) cases filed by those who wish to question or challenge the commission’s acts or orders in such cases.

Evidently, petitioner’s proposed complaint-in-intervention is an ordinary civil case that does not pertain to the
Sandiganbayan. As the Solicitor General stated, the complaint is not directed against PCGG as an entity, but
against a private corporation, in which case it is not per se, a PCGG case.
In the cases now before the Court, what are sought to be determined are the propriety of the election of a party
as a Director, and his authority to act in that capacity. Such issues should be exclusively determined only by the RTC
pursuant to the pertinent law on jurisdiction because they did not concern the recovery of ill-gotten wealth.13
(Emphasis supplied)cralawlawlibrary

In the case at bar, the complaint concerns PHILCOMSAT’s demand to exercise its right of inspection as
stockholder of PHC but which petitioners refused on the ground of the ongoing power struggle within POTC and
PHILCOMSAT that supposedly prevents PHC from recognizing PHILCOMSAT’s representative (Africa) as
possessing such right or authority from the legitimate directors and officers. Clearly, the controversy is intra-
corporate in nature as they arose out of intra-corporate relations between and among stockholders, and between
stockholders and the corporation.

As to the issue of whether the complaint should be dismissed for failure to state a cause of action since
PHILCOMSAT never authorized Africa to file it, we rule in the negative.

A complaint should not be dismissed for insufficiency of cause of action if it appears clearly from the complaint
and its attachments that the plaintiff is entitled to relief. Conversely, a complaint may be dismissed for lack of
cause of action if it is obvious from the complaint and its annexes that the plaintiff is not entitled to any relief.14
Here, attached to the complaint is the Board Secretary’s Certificate 15 stating, among others, that PHILCOMSAT
board of directors had authorized its President to exercise the right of inspection in its subsidiary PHC, and to file
a case in court in case of refusal by PHC.

Petitioners insist that the board meeting held on September 22, 2005 where the aforesaid resolution was
approved, is void for want of a quorum “as the majority of the legitimate directors of PHILCOMSAT were not
present at and notified of the meeting.” This clearly alludes to the Nieto-PCGG group’s non-recognition of the
election of the board of directors of POTC and PHILCOMSAT conducted by the Africa-Bildner group.

The issue thus boils down to the legitimacy of the Africa-Bildner group as the controlling interest in
PHILCOMSAT.

In the same cited case of Philippine Overseas Telecommunications Corp. (POTC) v. Africa, 16 we have further
settled with finality, under the doctrine of stare decisis, the question of who between the contending factions
(Africa-Bildner) and (Nieto-PCGG) held the controlling interest in POTC, and consequently PHILCOMSAT and
PHC. Thus:chanRoblesvirtualLawlibrary

The question of who held the majority shareholdings in POTC and PHILCOMSAT was definitively laid to rest in G.R.
No. 141796 and G.R. No. 141804, whereby the Court upheld the validity of the compromise agreement the
Government had concluded with Atty. Ilusorio. Said the Court:
With the imprimatur of no less than the former President Fidel V. Ramos and the approval of the Sandiganbayan,
the Compromise Agreement must be accorded utmost respect. Such amicable settlement is not only allowed but
even encouraged. Thus, in Republic vs. Sandiganbayan, we held:

Page 248 of 343

xxxx

The authority of the PCGG to enter into Compromise Agreements in civil cases and to grant immunity, under
certain circumstances, in criminal cases is now settled and established. In Republic of the Philippines and Jose O.
Campos, Jr. vs. Sandiganbayan, et al. (173 SCRA 72 [1989]), this Court categorically stated that amicable
settlements and compromises are not only allowed but actually encouraged in civil cases. A specific grant of
immunity from criminal prosecutions was also sustained. In Benedicto vs. Board of Administrators of Television
Stations RPN, BBC, and IBC (207 SCRA 659 [1992]), the Court ruled that the authority of the PCGG to validly enter
into Compromise Agreement for the purpose of avoiding litigation or putting an end to one already commenced
was indisputable. x x x (italics supplied)
Having been sealed with court approval, the Compromise Agreement has the force of res judicata between the
parties and should be complied with in accordance with its terms. Pursuant thereto, Victoria C. de los Reyes,
Corporate Secretary of the POTC, transmitted to Mr. Magdangal B. Elma, then Chief Presidential Legal Counsel
and Chairman of PCGG, Stock Certificate No. 131 dated January 10, 2000, issued in the name of the Republic of
the Philippines, for 4,727 POTC shares. Thus, the Compromise Agreement was partly
implemented.cralawlawlibrary

As a result of the Government having expressly recognized that 673 POTC shares belonged to Atty. Ilusorio, Atty.
Ilusorio and his group gained the majority control of POTC.

Applying the ruling in G.R. No. 141796 and G.R. No. 141804 to Civil Case No. 04-1049, the RTC (Branch 138)
correctly concluded that the Nieto-PCGG Group, because it did not have the majority control of POTC, could not
have validly convened and held the stockholders’ meeting and election of POTC officers on August 5, 2004 during
which Nieto, Jr. and PCGG representative Guy De Leon were respectively elected as President and Chairman; and
that there could not be a valid authority for Nieto, Jr. and/or Locsin to vote the proxies of the group in the
PHILCOMSAT meeting.

For the same reason, the POTC proxies used by Nieto, Jr. and Locsin to elect themselves respectively as Chairman
and President of PHILCOMSAT; and the PHILCOMSAT proxies used by Nieto, Jr. and Locsin in the August 31, 2004
PHC elections to elect themselves respectively as President and Acting Chairman of PHC, were all invalid for not
having the support of the majority shareholders of said corporations.

While it is true that judicial decisions should be given a prospective effect, such prospectivity did not apply to the
June 15, 2005 ruling in G.R. No. 141796 and G.R. No. 141804 because the ruling did not enunciate a new legal
doctrine or change the interpretation of the law as to prejudice the parties and undo their situations established
under an old doctrine or prior interpretation. Indeed, the ruling only affirmed the compromise agreement
consummated on June 28, 1996 and approved by the Sandiganbayan on June 8, 1998, and accordingly
implemented through the cancellation of the shares in the names of IRC and MLDC and their registration in the
names of Atty. Ilusorio to the extent of 673 shares, and of the Republic to the extent of 4,727 shares. In a manner
of speaking, the decision of the Court in G.R. No. 141796 and G.R. No. 141804 promulgated on June 15, 2005
declared the compromise agreement valid, and such validation properly retroacted to the date of the judicial
approval of the compromise agreement on June 8, 1998.

Consequently, although the assailed elections were conducted by the Nieto-PCGG group on August 31, 2004 but
the ruling in G.R. No. 141796 and G.R. No. 141804 was promulgated only on June 15, 2005, the ruling was the legal
standard by which the issues raised in Civil Case No. 04-1049 should be resolved.17 (Emphasis
supplied)cralawlawlibrary

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated October 21, 2011 and Resolution dated
February 10, 2012 of the Court of Appeals in CA-G.R. SP No. 99789 are hereby AFFIRMED.

No pronouncement as to costs.

BANKING LAW

Page 249 of 343

G.R. No. 163654 October 8, 2014

BPI EXPRESS CARD CORPORATION,* Petitioner,

vs.
MA. ANTONIA R. ARMOVIT, Respondent.

DECISION

BERSAMIN, J.:

This case involves a credit card holder's claim for damages arising from the suspension of her credit privileges
due to her supposed failure to reapply for their reactivation. She has insisted that she was not informed of the
condition for reactivation.

The Case

Petitioner BPI Express Credit Card Corporation (BPI Express Credit) seeks the reversal of and assails the adverse
decision promulgated on February 26, 2004, 1 whereby the Court of Appeals (CA) affirmed the judgment rendered
on April 22, 1996 by the Regional Trial Court, Branch 216, in Quezon City, (RTC) adjudging it liable to pay moral
and exemplary damages, attorney’s fees and costs of suit to its credit card holder Ma. Antonia R. Armovit, the
respondent herein.2

Antecedents

Armovit, then a depositor of the Bank of the Philippine Islands at its Cubao Branch, was issued by BPI Express
Credit a pre-approved BPI Express Credit Card (credit card) in 1989with a credit limit of ₱20,000.00 that was to
expire atthe end of March 1993.3 On November 21, 1992, she treated her British friends from Hong Kongto lunch
at Mario’s Restaurant in the Ortigas Center in Pasig. As the host, she handed to the waiter her credit card to settle
the bill, but the waiter soon returned to inform her that her credit card had been cancelled upon verification with
BPI Express Credit and would not be honored. Inasmuch asshe was relying on her credit card because she did not
then carry enough cash that day, her guests were made to share the bill to her extreme embarrassment.

Outraged, Armovit called BPI Express Credit to verify the status of her credit card. She learned that her credit card
had been summarily cancelled for failure to pay her outstanding obligations. She vehemently denied having
defaulted onher payments. Thus, by letter dated February 3, 1993, 4 she demanded compensation for the shame,
embarrassment and humiliation she had suffered in the amount of ₱2,000,000.00.

In its reply letter dated February 5, 1993,5 BPI Express Credit claimed that it had sent Armovit a telegraphic
message on March 19, 1992 requesting her to pay her arrears for three consecutive months, and that she did not
comply with the request, causing it totemporarily suspend her credit card effective March 31, 1992. 6 It further
claimed that she had been notified of the suspension and cautioned to refrain from using the credit card to avoid
inconvenience or embarrassment;7 and that while the obligation was settled by April, 1992, she failed to submit
the required application form in order to reactivate her credit card privileges. Thus, BPI Express Credit countered
that her demand for monetary compensation had no basis in fact and in law.

On March 12, 1993, Armovit received a telegraphic message from BPI Express Credit apologizing for its error of
inadvertently including her credit card in Caution List No. 225 dated March 11, 1993 sent to its affiliated
merchants.8

As a result, Armovit sued BPI Express Credit for damages in the RTC, insisting that she had been a credit card
holder in good standing, and that she did not have any unpaid bills at the time of the incident.

In its answer with counterclaim,9 BPI Express Credit raised the defense of lack of cause of action,and maintained
that Armovit had defaulted in her obligations for three consecutive months, thereby causing the temporary
suspension of her credit card in accordance with the terms and conditions of the credit card.10 It pointed out that
Page 250 of 343
Armovit had been duly notified of the suspension; that for her failure to comply with the requirement for the
submission of the application form and other documents as directed in its letter dated April 8, 1992, 11 her credit
card had not been reactivated and had remained in the list of suspended cards at the time she used it on
November 21, 1992; and thatthe telegraphic message of March 11, 1993, which was intended for another client
whose credit card had been erroneously included in the caution list, was mistakenly sent to her. 12

Judgment of the RTC

In the judgment rendered April 22, 1996,13 the RTC, ruling in favor of Armovit, observed that the terms and
conditions governing the issuance and use of the credit card embodied in the application formhad been
furnished to her for the first time only on April 8, 1992, or after her credit card privileges had already been
suspended; that, accordingly, she could not be blamed for not complying with the same; that even if she had
been notified of the temporary suspension of her credit card, her payment on April 1, 1992 had rendered the
continued suspension of her credit card unjustified; and that there was no clear showing that the submission of
the application form had been a condition precedent to the lifting of its suspension.

Finding BPI Express Credit guilty ofnegligence and bad faith, the RTC ordered it to pay Armovit moral damages of
₱100,000.00; exemplary damages and attorney’s fees each in the amount of ₱10,000.00; and the costs of suit.

Decision of the CA

Both parties appealed to the CA.

On February 26, 2004, the CA promulgated its assailed decision, 14 concurring with the RTC, and declaredthat
because Armovit had not signed any application form in the issuance and renewals of her credit card from 1989
up to 1992, she could not have known the terms and conditions embodied in the application form even ifthe
credit card had specified that its use bound the holder to its terms and conditions. It did not see merit in BPI
Express Credit’s contention that the submission of a new application form was a pre-requisite for the lifting ofthe
suspension of her credit card, inasmuch as such condition was not stated in a clear and unequivocal manner in its
letter dated April 8, 1992. It noted that the letter of apology mentioning another inadvertence committed, even if
it claimed the letter of apology as intended for another card holder, still highlighted BPI Express Credit’s
negligence in its dealings with her account. Anent Armovit’s appeal, the CA did not increase the amounts of
damages for lack of basis, observing that moral and exemplary damages were awarded not to enrich her at the
expense of BPI Express Credit but to alleviate the anxiety and embarrassment suffered.

BPI Express Credit’s motion for reconsideration was denied through the resolution promulgated on May 14,
2004.15

Hence, this appeal by petition for review on certiorari.

Issue

The sole issue is whether or not the CA erred in sustaining the award of moral and exemplary damages in favor of
Armovit.

Ruling of the Court

The petition for review lacks merit.

The relationship between the credit card issuer and the credit card holder is a contractual one that is governed by
the terms and conditions found in the card membership agreement. 16 Such terms and conditions constitute the
law between the parties. In case of their breach, moral damages may be recovered where the defendant is shown
to have acted fraudulently or in bad faith. 17 Malice or bad faith implies a conscious and intentional design to do a
wrongful actfor a dishonest purpose or moral obliquity. 18 However, a conscious or intentional design need not

Page 251 of 343

always be present because negligence may occasionally be so gross as to amount to malice or bad faith. 19 Hence,
bad faith in the context of Article 2220 of the Civil Code includes gross negligence. 20

BPI Express Credit contends thatit was not grossly negligent in refusing to lift the suspension of Armovit’s credit
card privileges inasmuch as she had not complied with the requisite submission of a new application form; and
that under the circumstances its negligence, if any, was not so gross as to amount to malice or bad faith following
the ruling in Far East Bank and Trust Company v. Court of Appeals. 21

The Court disagrees with the contentions of BPI Express Credit.1âwphi1 The Terms and Conditions Governing the
Issuance and Use of the BPI Express Credit Card 22 printed on the credit card application form spelled out the
terms and conditions of the contract between BPI Express Credit and its card holders, including Armovit. Such
terms and conditions determined the rights and obligations of the parties. 23 Yet, a review of such terms and
conditions did not reveal that Armovit needed to submit her new application as the antecedent condition for her
credit card to be taken out of the list of suspended cards.

Considering that the terms and conditions nowhere stated that the card holder must submit the new application
form in order to reactivate her credit card, to allow BPI Express Credit toimpose the duty to submit the new
application form in order to enableArmovit to reactivate the credit card would contravene the Parol Evidence
Rule.24 Indeed, there was no agreement between the parties to add the submission of the new application form
as the means to reactivate the credit card. When she did not promptly settle her outstanding balance, BPI Express
Credit sent a message on March 19, 1992 demanding payment with the warning that her failure to pay would
force it to temporarily suspend her credit card effective March 31, 1992. It then sent another demand letter dated
March 31, 1992 requesting her to settle her obligation in order to lift the suspension of her credit card and
prevent its cancellation. In April 1992, she paid her obligation. In the context of the contemporaneous and
subsequent acts of the parties, the only condition for the reinstatement of her credit card was the payment of her
outstanding obligation.25 Had it intended otherwise, BPI Express Credit would have surelyu informed her of the
additional requirement in its letters of March 19, 1992 and March 31, 1992. That it did not do so confirmed that
they did not agree on having her submit the new application form as the condition to reactivate her credit card.

The letter of BPI Express Credit dated April 8, 1992 did not clearly and categorically inform Armovit that the
submission of the new application form was the pre-condition for the reactivation of her credit card. The
statement in the letter (i.e., "… accomplish the enclosed application form and provide us with
informations/documents that can help our Credit Committee in reevaluating your existingfacility with us.") merely
raised doubt as to whether the requirement had really been a pre-condition or not. With BPI Express Credit being
the party causing the confusion, the interpretation of the contract could not be donein its favor. 26 Moreover, it
cannot be denied that a credit card contract is considered as a contract of adhesion because its terms and
conditions are solely prepared by the credit card issuer. Consequently, the terms and conditions have to be
construed against BPI Express Credit as the party who drafted the contract. 27

Bereft of the clear basis to continuewith the suspension of the credit card privileges of Armovit, BPI Express Credit
acted in wanton disregard of its contractual obligations with her. We concur with the apt observation by the CA
that BPI Express Credit’s negligence was even confirmed by the telegraphic message it had addressed and sent to
Armovit apologizing for the inconvenience caused in inadvertently including her credit card in the caution list. It
was of no consequence that the telegraphic message could have been intended for another client, as BPI Express
Credit apparently sought to convey subsequently, because the tenor ofthe apology included its admission of
negligence in dealing with its clients, Armovit included. Indeed, BPI Express Credit did not observe the prudence
expected of banks whose business was imbued with public interest.

We hold that the CA rightly sustained the award of ₱100,000.00 as moral damages. To us, too, that amount was
fair and reasonable under the circumstances. Similarly, the grant of exemplary damages was warranted under
Article 2232 of the New Civil Code because BPI Express Credit acted in a reckless and oppressive manner. Finally,
with Armovit having been forced to litigate in order to protect her rights and interests, she was entitled to recover
attorney's fees and expenses oflitigation.28

Page 252 of 343

WHEREFORE, the Court AFFIRMS the decision promulgated on February 26, 2004; and ORDERS the petitioner to
pay the costs of suit.

SO ORDERED.

LUCAS P. BERSAMIN
Associate Justice

G.R. No. 172652 November 26, 2014

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

x-----------------------x

G.R. No. 175302

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

x-----------------------x

G.R. No. 175394

GLOBAL BUSINESS BANK, INC., Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

The three consolidated petitions herein all assail the Decision 1 of the Court of Appeals in CA-G.R. CV No. 77508
dated May 5, 2006, and the Resolution 2 in the same case dated November 6, 2006.

Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He usually buys
dollars from Gonzalo B. Nuguid (Nuguid) at the exchange rate prevailing on the date of the sale. Chiok pays
Nuguid either in cash or manager’s check, to be picked up by the latter or deposited in the latter’s bank account.
Nuguid delivers the dollars either on the same day or on a later date as may be agreed upon between them, up
to a week later. Chiok and Nuguid had been dealing in this manner for about six to eight years, with their
transactions running into millions of pesos. For this purpose, Chiok maintained accounts with petitioners
Metropolitan Bank and Trust Company (Metrobank) and Global Business Bank, Inc. (Global Bank), the latter being
then referred to as the Asian Banking Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase Line
Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor of, or negotiated to, Chiok may be
purchased by Asian Bank. Upon such purchase, Chiok receives a discounted cash equivalent of the amount of the
check earlier than the normal clearing period.

On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased" Security Bank & Trust Company (SBTC)
Manager’s Check (MC) No. 037364 in the amount of ₱25,500,000.00 issued in the name of Chiok, and credited
the same amount to the latter’s Savings Account No. 2-007-03-00201-3.

On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of ₱7,550,000.00 and MC No.
025939 in the amount of ₱10,905,350.00 to Gonzalo Bernardo, who is the same person as Gonzalo B. Nuguid.
Page 253 of 343
The two Asian Bank manager’s checks, with a total value of ₱18,455,350.00 were issued pursuant toChiok’s
instruction and was debited from his account. Likewise upon Chiok’s application, Metrobank issued Cashier’s
Check (CC) No. 003380 in the amount of ₱7,613,000.00 in the name of Gonzalo Bernardo. The same was debited
from Chiok’s Savings Account No. 154-42504955. The checks bought by Chiok for payee Gonzalo Bernardo are
therefore summarized as follows:

Drawee Bank/Check
Amount (P) Source of fund
No.

Asian Bank MC No. 7,550,000.00

025935 Chiok’s Asian Bank Savings
Asian Bank MC No. 10,905,350.00 Account No. 2-007-03-00201-3,
025939 which had been credited with the
(aggregate value value of SBTC MC No. 037364
of (₱25,500,000.00) when the latter was purchased by Asian
Asian Bank MCs: Bank from Chiok pursuant to their BPLA.
18,455,350.00)

Metrobank CC No. 7,613,000.00 Chiok’s Metrobank Savings

003380 Account No. 154-425049553

TOTAL 26,068,350.00

Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939, and Metrobank CC No.
003380), with an aggregate value of ₱26,068,350.00 in Nuguid’s account with Far East Bank & Trust Company
(FEBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Nuguid was supposed to
deliver US$1,022,288.50,4 the dollar equivalent of the three checks as agreed upon, in the afternoon of the same
day. Nuguid, however, failed to do so, prompting Chiok to request that payment on the three checks be stopped.
Chiok was allegedly advised to secure a court order within the 24-hour clearing period. On the following day, July
6, 1995, Chiok filed a Complaint for damages with application for ex parte restraining order and/or preliminary
injunction with the Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo and Marinella Nuguid,
and the depositary banks, Asian Bank and Metrobank, represented by their respective managers, Julius de la
Fuente and Alice Rivera. The complaint was docketed as Civil Case No. Q-95-24299 and was raffled to Branch 96.
The complaint was later amended5 to include the prayer of Chiok to be declared the legal owner of the proceeds
of the subject checks and to be allowed to withdraw the entire proceeds thereof.

On the same day, July 6, 1995, the RTC issued a temporary restraining order (TRO) directing the spouses Nuguid
to refrain from presenting the said checks for payment and the depositary banks from honoring the sameuntil
further orders from the court.6

Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO. Metrobank claimed that
when it received the TRO on July 6, 1995, it refused to honor CC No. 003380 and stopped payment thereon.
However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed
Metrobank that the TRO was issued a day after the check was presented for payment. Thus, according to Paz, the
transaction was already consummated and FEBTC had already validly accepted the same. In another letter, FEBTC
informed Metrobank that "the restraining order indicates the name of the payee of the check as GONZALO
NUGUID, but the check isin fact payable to GONZALO BERNARDO. We believe there is a defect in the restraining
order and as such should not bind your bank." 7 Alice Rivera of Metrobank replied to said letters, reiterating
Metrobank’s position tocomply with the TRO lest it be cited for contempt by the trial court. However, as would
later be alleged in Metrobank’s Answer before the trial court, Metrobank eventually acknowledged the check
when it became clear that nothing more can be done to retrieve the proceeds of the check. Metrobank
furthermore claimed that since it is the issuer of CC No. 003380, the check is its primary obligation and should
not be affected by any prior transaction between the purchaser (Chiok) and the payee (Nuguid).

Page 254 of 343

In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank before the Philippine
Clearing House Corporation (PCHC) Arbitration Committee for the collection of the value of Asian Bank MC No.
025935 and 025939, which FEBTC had allegedly allowed Nuguid to withdraw on July 5, 1995, the same day the
checks were deposited. The case was docketed as Arbicom Case No. 95-082. The PCHC Arbitration Committee
later relayed, in a letter dated August 4, 1995, its refusal to assume jurisdiction over the case on the ground that
any step it may take might be misinterpreted as undermining the jurisdiction of the RTC over the case or a
violation of the July 6, 1995 TRO.

On July 25, 1995, the RTC issued an Order directing the issuance of a writ of preliminary prohibitory injunction:

WHEREFORE, upon filing by the plaintiff of a sufficient bond in the amount of ₱26,068,350.00, to be executed in
favor of the defendants under the condition that the same shall answer for whatever damages they may sustain
by reason of this injunction should the Court ultimately determine that he was not entitled thereto, let a writ of
preliminary prohibitory injunction issue restraining and preventing during the pendency of the case:

a) Defendant Asian Bank frompaying Manager’s Checks No. 025935 in the amount of ₱7,550,000.00 and
No. 025939 in the amount of ₱10,905,350.00; and

b) Defendant Metro Bank frompaying Cashier’s Check No. 003380 in the amount of ₱7,613,000.00.

The application for preliminary mandatory injunctionis hereby denied and the order issued on July 7, 1995
directing defendant Metro Bank (Annapolis, Greenhills Branch) to allow the plaintiff to withdraw the proceeds of
Cashier’s Check No. 003380 in the amount of ₱7,613,000.00 is hereby set aside.

The plaintiff’s urgent motion todeclare defendants Asian Bank and Metro Bank in contempt of court filed last July
13, 1995 is hereby denied for lack of legal basis.

The writ of preliminary prohibitory injunction and a copy of this order shall be served on the defendants by
Deputy Sheriff Jose Martinez of this Branch.8

Upon the filing by Chiok of the requisite bond, the Writ was subsequently issued on July 26, 1995.

Before the RTC, Asian Bank pointed out that SBTC returned and issued a Stop Payment Order on SBTC MC No.
037364 (payable to Chiok in the amount of ₱25,500,000.00) on the basis of an Affidavit of Loss & Undertaking
executed by a certain Helen Tan. Under said Affidavit of Loss & Undertaking, Tan claims that she purchased SBTC
MC No. 037364 from SBTC, but the manager’s check got lost on that day. Asian Bank argued that Chiok would
therefore be liable for the dishonor of the manager’s check under the terms of the BPLA, which provides for
recourse against the seller (Chiok) of the check when it is dishonored by the drawee (SBTC) for any reason,
whether valid or not.

On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil Case No. Q-95-24299. On February6, 1996,
the RTC initially denied FEBTC’s intervention in the case. On Motion for Reconsideration, however, the RTC, on
April 15, 1996, reversed itself and allowed the same.

In the Complaint-in-Intervention, FEBTC claimed that it allowed the immediate withdrawal of the proceeds of
Asian Bank MC Nos. 025935 and 025939 on the ground that, as manager’schecks, they were the direct
obligations of Asian Bank and were accepted in advance by Asian Bank by the mere issuance thereof. FEBTC
presented the checks for payment on July 5, 1995 through the PCHC. Asian Bank, as admitted in its Answer before
the RTC, received the same on that day. Consequently, Asian Bank was deemed to have confirmed and booked
payment of the subject checks in favor of FEBTC or, at the latest, during the first banking hour of July 6, 1995,
when payment should have been made. FEBTC claimed that Asian Bank exhibited bad faith when, in anticipation
of the TRO, it opted to float the checks until it received the TRO at 12:00 noon of July 6, 1995 to justify the
nonpayment thereof.

Page 255 of 343

In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid had delivered much more dollars than
what was required for the three checks at the time of payment. By way of special affirmative defense, the spouses
Nuguid also claims that since the subject checks had already been paid to him, Chiok is no longer entitled to an
injunction (to hold the payment of the subject checks), and Civil Case No. Q-95-24299 has already become moot.

On August 29, 2002, the RTC rendered its Decision, the dispositive portion of which states:

WHEREFORE, judgment is rendered:

1. Declaring as permanent the writ of preliminary injunction issued under the Order of July 25, 1995;

2. Ordering Global Business Bank, Inc.to pay the plaintiff [Chiok]:

a.) The amount of ₱34,691,876.71 (less the attorney’s fees of ₱255,000.00 which shall remain with
Global Business Bank, Inc.), plus interest at the legal rate of 12%/p.a. from September 30, 1999
until fully paid;

b.) The amount of ₱215,000.00, representing the excess amount debited from the plaintiff’s
deposit in his account with Global Business Bank, Inc. on July 7, 1995, plus interest of 12%/p.a.
from July 7, 1995, until fully paid;

c.) Attorney’s fees equivalentof 5% of the total amount due; and

3. Ordering Metropolitan Bank & Trust Companyto pay the plaintiff:

a. The amount of his deposit of ₱7,613,000.00, plus interest of 12%/p.a. from July 5, 1995 until
said amount is fully paid; and

b. Attorney’s fees of 5%of the total amount due;

4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable jointly and severally with Global
Business Bank, Inc. and Metropolitan Bank & Trust Company, Inc. for the respective attorney’s fees;

5. Dismissing the complaint-in-interventionof BPI for lack of merit;

6. Ordering the defendantsand the intervenorto pay, jointly and severally, the costs of suit. 9

(Emphases supplied.)

The RTC held that Nuguid failed to prove the delivery of dollars to Chiok. According to the RTC, Nuguid’s claim
that Chiok was still liable for seven dishonored China Banking Corporation (CBC) checks with a total worth of
₱72,984,020.00 is highly doubtful since such claim was not presented as a counterclaim in the case. Furthermore,
the court ruled that the certification of CBC stating the reasons 10 for the stop payment order "are indicative of
Chiok’s non-liability to Nuguid." The RTC further noted that there was a criminal case filed by Chiok against
Nuguid on March 29, 1996 for estafa and other deceit on account of Nuguid’s alleged failure to return the
originals of the seven CBC checks.11

The RTC went on to rule that manager’s checks and cashier’s checks may be the subject of a Stop Payment Order
from the purchaser on the basis of the payee’s contractual breach. As explanation for this ruling, the RTC adopted
its pronouncements when it issued the July 25, 1995 Order:

Defendant Nuguid’s argument that the injunction could render manager’s and cashier’schecks unworthy of the
faith they should have and could impair their nature as independent undertakings of the issuing banks is
probably an undistinguished simplification. While the argument may be applicable to such checks in general, it

Page 256 of 343

does not adequately address the situation, as here, when specific manager’s and cashier’s checks are already
covered by reciprocal undertakings between their purchaser and their payee, in which the latter allegedly failed to
perform. The agreement herein was supposedly one in which Nuguid would deliver the equivalent amount in US
dollars ($1,022,288.23) "on the same date" that the plaintiff purchased and delivered the manager’s and cashier’s
checks (₱26,068,350.00). Assuming that such a reciprocity was true, the purchaser should have the legal
protection of the injunctive writ (which, after all, the legal departments of the issuing banks themselves allegedly
advised the plaintiff to obtain), since the usual order or instruction to stop payment available in case of ordinary
checks did not avail. This was probably the reason that Asian Bank has expressly announced in its own
comment/opposition of July 14, 1995 that it was not opposing the application for the prohibitory injunction.

The dedication of such checks pursuantto specific reciprocal undertakings between their purchasers and payees
authorizes rescission by the former to prevent substantial and material damage to themselves, which authority
includes stopping the payment of the checks. 12 According to the RTC, both manager’s and cashier’s checks are
still subject to regular clearing under the regulations of the Bangko Sentral ng Pilipinas. Since manager’s and
cashier’s checks are the subject of regular clearing, they may consequently be refused for cause by the drawee,
which refusal is in fact provided for in the PCHC Rule Book.

The RTC found the argument by BPI that the manager’s and cashier’s checks are pre-cleared untenable under
Section 60 of the New Central Bank Act and Article 1249 of the Civil Code, which respectively provides:

Section 60. Legal Character. – Checks representing demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the option of the creditor; Provided, however,
that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery
to the creditor of cash in an amount equal to the amount credited to his account.

Art. 1249. The payment of debts inmoney shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory
notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment
only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. The RTC went on
to rule that due to the timely service of the TRO and the injunction, the value of the three checks remained with
Global Bank and Metrobank.13 The RTC concluded that since Nuguid did not have a valid title to the proceeds of
the manager’s and cashier’s checks, Chiok is entitled to be paid back everything he had paid to the drawees for
the checks.14

With respect to Global Bank, the RTC ruled that the entire amount of ₱34,691,876.71 it recovered from SBTC from
the September 15, 1997 PCHC Decision, as reflected in the September 29, 1999 Charge Slip No. 114977, less the
sum of ₱225,000.00 awarded by the arbitration committee’s decision as attorney’s fees, should be paidto Chiok,
with interest at 12% per annum from September 30, 1999 until full payment. The RTC likewise ordered Global
Bank to pay Chiok the amount of ₱215,390.00, an amount debited from Chiok’s account as payment for
outstanding bills purchase.15

With respect to Metrobank, the RTC ruled that it should pay Chiok ₱7,613,000.00, the amount paid by Chiok to
purchase the CC, plus interest of 12 percent per annum from July 5,1995 until full payment. The RTC explained this
finding as follows:

The same conclusion is true with respect to Metro Bank, with whom the funds amounting to ₱7,613,000.00 for the
purchase of CC No. 003380 has remained. According to Chiok, Metro Bank used such funds in its operations.

In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness for Metro Bank, but in lieu ofher
testimony, the parties agreed to stipulate on the following as her testimony, to wit:

1. That Metro Bank paid the amount of CC No. 003280;

Page 257 of 343

 2. That the payment on July 12, 1995 was made while the TRO of July 5, 1995 was in force;

3. [That] the payment on July 12, 1995 was on the third clearing of CC No. 003380; and

4. That the PCHC Rule book was the authority on the rules and regulations on the clearing operations of
banks.

The payment to FEBTC by Metro Bank of CC No. 003380 on July 12, 1995 was an open defiance of the TRO of July
6, 1995. Metro Bank’s Branch Manager Alice Rivera, through her letter of July 10, 1995 to FEBTC as the collecting
bank, returned the CC to FEBTC in compliance with the TRO which was received about 12:10 noon of July 6, 1999.
Hence, Metro Bank should not have paid because the TRO was served within the 24-hour period to clear checks.
Moreover, the payment, being made on third clearing, was unjustified for violating existing regulations,
particularly paragraph 1 of the Clearing House Operating Memo (CHOM), effective September 1, 1984, which
prohibited the reclearing of a check after its first presentation if it was returned for the reason of "stop payment"
or "closed account."

It also seems that Metro Bank paid the CC without first checking whether, in fact, any actual payment of the 3
checks had been made on July 5, 1995 to the payee when the checks were deposited in payee’s account with
FEBTC on July 5, 1995. The records show no such payment was ever made to render the TRO of July 6, 1995 or the
writ of preliminary injunction applied for moot and academic.

Jessy A. Degaños – adopted by Metro Bank as its own witness in injunction hearing of July 24, 1995 – stated that
the payment of the 3 checks consisted of the accounting entry made at the PCHC during the presenting process
by debiting the respective accounts of the drawees and crediting the account of collecting bank FEBTC. Yet, as
already found hereinabove, such process was reversed due to the return by the drawees of the checks which they
dishonored on account of the TRO.

Also, Degaños, testifying on January 17, 2002 for intervenor BPI, was asked in what form was the withdrawal of
the amounts of the checks made by Nuguid on July 5, 1995, that is, whether:- 1) cash withdrawal; or 2) credit to
Nuguid’s account; or 3) draft issued to Nuguid. His reply was that only the bank’s branch which serviced the
payee’s account could provide the answer. Yet, BPI did not present any competent personnel from the branch
concerned to enlighten the Court on this material point.

This amount of ₱7,613,000.00, having remained with Metro Bank since the service of the TRO of July 6, 1995 and
the writ of preliminary injunction issued under the Order of July 25, 1998, should be returned to Chiok with
interest of 12%/p.a. from July 7, 1995 until full payment. 16

(Citations omitted.)

The RTC likewise denied BPI’s complaint-in-intervention to recover the value of the three checks from drawees
Global Bank and Metrobank for lack of merit. The RTC, after reprimanding Global Bank and Metrobank for siding
with BPI on this issue, held that BPI, as a mere collecting bank of the payee with a void title to the checks, had no
valid claim as to the amounts of such checks. The RTC explained:

Firstly: BPI, being a collecting bankin relation to the 3 checks, was merely performing collection services as an
agent of Nuguid, the payee. If, as found hereinbefore, Nuguid could not have legal title to the 3 checks, it follows
that BPI could not stake any claim for title better than Nuguid’s own void title. Consequently, BPI has no right to
claim the amounts of the 3 checks from the drawee-banks.

Secondly: The purpose of the delivery of the 3 checks to BPI – which was not even accompanied by Nuguid’s
endorsement – was solely for deposit in the account of payee Nuguid. Assuming, for the sake of argument, that
BPI as the collecting bank paid the value of the checks – of which fact there has been no proof whatsoever – BPI
was nonetheless, at best, a mere transferee whose title was no better than the void title of the transferor, payee
Nuguid. Under such circumstance, BPI has no legal basis to demand payment of the amounts of the 3 checks
from the draweebanks.
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Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee without indorsement, was not considered a
holder of the instrument since it was neither a payee nor an indorsee. It would become so only when and if the
indorsement is actually made, and only as of then, but not before, is the issue whether BPI was a holder in due
course or not is determined.

Consequently, any alleged payment by BPI as the collecting bank, through the supposed though unproved
withdrawal of the amounts of the 3 checks by Nuguid upon the deposit of the checks on July 5, 1995, is not the
payment which discharges liability under the 3 checks because BPI is neither the party primarily liable northe
drawee.

Such a payment, if true, is akin to, if it is not, drawing against uncollected deposits (DAUD). In such a case, BPI
was in duty bound to send the 3 checks to the PCHC for clearing pursuant to Section 1603.c.1 of the BSP Manual
of Regulations and Sec. 60, R.A. No. 7653. It serves well to note herein that Global Bank and Metro Bank returned
the checks through the PCHC on July 6, 1995, well within the 24-hour clearing period, in compliance with the TRO
of July 6, 1995. Finally: As earlier noted and discussed, there is no evidence of any prior valid payment by the
collecting bank to support its claim of the amounts of the 3 checks against the defendant banks. 17 (Citation
omitted.)

The RTC held Global Bank and Metrobank liable for attorney’s fees equivalent to 5% of the total amountdue
them, while the spouses Nuguid were held solidarily liable for said fees.

Defendants Global Bank, Metrobank, and the spouses Nuguid, and intervenor BPI filed separate notices of
appeal, which were approved in the Order18 dated April 3, 2003. Chiok filed a Motion to Dismiss against the
appeal of Global Bank, on the ground that the latter had ceased to operate as a banking institution.

On May 26, 2004, the Court of Appeals dismissed the appeal of the spouses Nuguid pursuant to Section 1(e),
Rule 50 of the Rules of Court, on account of their failure to file their appellant’s brief. In the same Resolution, the
Court of Appeals denied Chiok’s Motion to Dismiss.

On May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the RTC Decision with
modifications. The fallo of the Decision reads:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96, Quezon City is
AFFIRMED with the following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee
Wilfred N. Chiok and defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check
Nos. 025935 and 025939 and Cashier’s Check No. 003380 are ordered cancelled.

2.) Global Business Holdings, Inc. is ordered to credit Savings Account No. 2-007-03-00201-3 with:

a) The amount of ₱25,500,000.00, plus interest at 4% from September 29, 1999 until withdrawn
by plaintiff-appellee;

b) The amount of ₱215,390.00, plus interest at 4% from July 7, 1995 until withdrawn by plaintiff-
appellee.

3.) Metropolitan Bank & Trust Company is ordered to credit Savings Account No. 154-42504955 the
amount of ₱7,613,000.00, with interest at 6% [per annum] from July 12, 1995 until the same is withdrawn;

4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered to pay attorney’s fees
equivalent to 5% of the total amount due to plaintiff-appellee from both depository banks, as well as the
costs of suit.19

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According to the Court of Appeals, Article 1191 of the Civil Code provides a legal basis of the right of purchasers
of MCs and CCs to make a stop payment order on the ground of the failure of the payee to perform his
obligation to the purchaser. The appellate court ruled that such claim was impliedly incorporated in Chiok’s
complaint. The Court of Appeals held:

By depositing the subject checks to the account of Nuguid, Chiok had already performed his obligation under the
contract, and the subsequent failure of Nuguid to comply with what was incumbent upon him gave rise to an
action for rescission pursuant to Article 1191 of the Civil Code, which states:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

xxxx

Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE RESTRAINING ORDER/INJUNCTION" when
the action was really one for rescission and damages, it is an elementary rule of procedure that what controls or
determines the nature of the action is not the caption of the complaint but the allegations contained therein. And
even without the prayer for a specific remedy, proper relief may nevertheless be granted by the court if the facts
alleged in the complaint and the evidence introduced so warrant.

That Chiok had intended rescission isevident from his prayer to be declared the legal owner of the proceeds of
the subject checks and to be allowed to withdraw the same. Therefore, the argument of BPI that the obligation
on the part of Nuguid to deliver the dollars still subsists is untenable. Article 1385 of the same Code provides that
rescission creates the obligation to return the things which were the object of the contract, together with their
fruits, and the price with its interest. The object of the contract herein to buy foreign currency is the peso-value of
the dollars bought but in the form of negotiable instruments – Manager’s Check/Cashier’s Check. Hence,
respecting the negotiation thereof, and in order to afford complete relief to Chiok, there arose the necessity for
the issuance of the injunction restraining the payment of the subject checks with the end in view of the eventual
return of the proceeds to give effect to Article 1385. In other words, the injunctive relief was necessary in order
not to render ineffectual the judgment in the instant case. We quote with approval the following disquisition of
the trial court, to wit:

xxxx

There is no question about the nature of manager’s and cashier’s checks being as good as cash, being primary
obligations of the issuing bank and accepted in advanceby their mere issuance. But even as such nature of
unconditional commitment to pay on the part of the issuing bank may be conceded, the Court opines that the
injunctive relief cannot be denied to a party who purchased the manager’s or cashier’s check to stop its payment
to the payee in a suit against the payee and the issuing banks upon a claim that the payee himself had not
performed his reciprocal obligation for which the issuance and delivery of the self-same manager’sor cashier’s
check were, in the first place, made x x x.

It bears stressing that the subject checks would not have been issued were it not for the contract between Chiok
and Nuguid. Therefore, they cannot be disassociated from the contract and given a distinct and exclusive
signification, as the purchase thereof is part and parcel of the series of transactions necessary to consummate the
contract. Taken in this light, it cannot be argued that the issuing banks are bound to honor only their
unconditional undertakings on the subject checks vis-à-vis the payee thereof regardless of the failed transaction
between the purchaser of the checks and the payee on the ground that the banks were not privy to the said
transaction.
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Lest it be forgotten, the purchase of the checks was funded by the account of Chiok with the banks. As such, the
banks were equally obligated to treat the account of their depositor with meticulous care bearing in mind the
fiduciary nature of their relationship with the depositor. Surely, the banks would not allow their depositor to sit
idly by and watch the dissipation of his livelihood considering that the business of foreign currency exchange is a
highly volatile undertaking where the probability of losing or gaining is counted by the ticking of the clock. With
the millions of money involved in this transaction, Chiok could not afford to be complacent and his vigilance for
his rights could not have been more opportune under the circumstances. 20 (Citations omitted.)

The Court of Appeals proceeded to sustain the dismissal of BPI’s complaint-in-intervention, which sought to
recover from Global Bank the amounts allegedly paid to Nuguid. The Court of Appeals pointed out that BPI failed
to prove the alleged withdrawal by Nuguid of the proceeds of the two manager’s checks, as BPI’s representative,
Jessy A. Degaños, failed to answer the question on the form of the alleged withdrawal. Furthermore, BPI failed to
prove that it was a holder in due course of the subject manager’s checks, for two reasons: (1) the checks were not
indorsed to it by Nuguid; and (2) BPI never presented its alleged bills purchase agreement with Nuguid. 21

The Court of Appeals likewise modified the order by the RTC for Global Bank and Metrobank to pay Chiok. The
Court of Appeals held that Chiok’s cause of action against Global Bank is limited to the proceeds of the two
manager’s checks. Hence, Global Bank was ordered to credit Chiok’s Savings Account No. 2-007-03-00201-3 with
the amount of ₱25,500,000.00, the aggregate value of the two managers’ checks, instead of the entire
₱34,691,876.71 recovered from SBTC from the September 15, 1997 PCHC Decision. The interest was also reduced
from 12% per annum to that imposed upon savings deposits, which was established during the trial as 4% per
annum.22

As regards Metrobank, the appellate court noted that there was no evidence as to the interest rate imposed upon
savings deposits at Metrobank. Metrobank was ordered to credit the amount of ₱7,613,000.00 to Chiok’s Savings
Account No. 154-42504955, with interest at 6% per annum.23

Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006 Court of Appeals’ Decision.
On November 6, 2006, the Court of Appeals denied the Motions for Reconsideration.

Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No. 175394) filed with this Court
separate Petitions for Review on Certiorari. In Resolutions dated February 21, 200724 and March 12, 2007,25 this
Court resolved to consolidate the three petitions. Metrobank submitted the following issues for the consideration
of this Court:

(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT "IT IS LEGALLY
POSSIBLE FOR A PURCHASER OF A MANAGER’S CHECK OR CASHIER’S CHECK TO STOP PAYMENT
THEREON THROUGH A COURT ORDER ON THE GROUND OF THE PAYEE’S ALLEGED BREACH OF
CONTRACTUAL OBLIGATION AMOUNTING TO AN ABSENCE OF CONSIDERATION THEREFOR."

(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR CASHIER’S CHECK, "IN VIEW OF THE
PECULIAR CIRCUMSTANCES OF THIS CASE" MAY BE SUBJECT TO A STOP PAYMENT ORDER BY THE
PURCHASER THEREOF THROUGH A COURT ORDER, WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED IN CONCLUDING THAT PETITIONER HEREIN "HAD KNOWLEDGE OF CIRCUMSTANCES
THAT WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS" WITHOUT, HOWEVER, CITING ANY
SPECIFIC EVIDENCE WHICH WOULD PROVE THE EXISTENCE OF SUCH KNOWLEDGE. (C) WHETHER OR
NOT THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE TRIAL COURT’S ORDER FOR
PETITIONER HEREIN "TO PAY (TO CHIOK) THE VALUE OF CASHIER’S CHECK NO. 003380 IN THE
AMOUNT OF ₱7,613,000.00, WHICH WAS DEBITED AGAINST CHIOK’S SAVINGS ACCOUNT # 154-
42504955 ON THE OBSERVATION THAT THE PAYMENT TO FEBTC BY METROBANK OF CC NO.
003380ON JULY 12, 1995 WAS AN OPEN DEFIANCE OF THE TRO OF JULY 6, 1995."26

BPI, on the other hand, presented the following issues:

I.
Page 261 of 343
Whether or not the Court of Appeals detracted from well-settled concepts and principles in commercial law
regarding the nature, causes, and effects of a manager’s check and cashier’s checkin ruling that [the] power of the
court can be invoked by the purchaser [Chiok] in a proper action, which the Court su[b]stantially construed as a
rescissory action or the power to rescind obligations under Article 1191 of the Civil Code.

II.

Whether or not the Honorable Court of Appeals erred in ruling that where a purchaser invokes rescission due to
an alleged breach of the payee’s contractual obligation, it is deemed as "peculiar circumstance" which justifies a
stop payment order issued by the purchaser or a temporary restraining order/injunction from a Court to prevent
payment of a Manager’s Check or a Cashier’s Check.

III.

Whether or not the Honorable Court of Appeals erred in ruling that judicial admissions in the pleadings of
Nuguid, BPI, Asian Bank, Metrobank and even Chiok himself that Nuguid had withdrawn the proceeds of the
checks will not defeat Chiok’s "substantial right" to restrain the drawee bank from paying BPI, the collecting bank
or presenting bank in this case who paid the value of the Cashier’s/Manager’s Checks to the payee. 27

Finally, Global Bank rely upon the following grounds in its petition with this Court:

A.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER GLOBAL BANK HAD NO JUSTIFICATION
FOR ITS RIGHT OF RECOURSE AGAINST RESPONDENT CHIOK NOTWITHSTANDING THE CLEAR AND
UNMISTAKABLE PROVISIONS OF THE BILLS PURCHASE AGREEMENT.

B.

THE COURT OF APPEALS GRAVELY ERRED IN MAKING PETITIONER GLOBAL BANK LIABLE FOR INTEREST OF 4%
PER ANNUM DESPITE THE FACT THAT:

1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS COMPLAINT;

2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST; AND

3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY INTEREST. 28

Before delving into the merits of these cases, we shall first dispose of a procedural development during their
pendency with the Court.

Joint Manifestation and Motion allegedly

filed by Metrobank, Global Bank and
respondent Chiok

On May 28, 2013, this Court received a Joint Manifestation and Motion allegedly filed by petitioners Metrobank,
Global Bank, and respondent Chiok, which reads:

PETITIONERS METROPOLITAN BANK & TRUST COMPANY & GLOBAL BUSINESS BANK, INC., and RESPONDENT
WILFRED N. CHIOK, by their respective counsels, unto this Honorable Court, respectfully state that after a
thorough consideration, the parties herein have decided to forego their respective claims against each other,
including, past, present and/or contingent, in relation to the above referenced cases.

PRAYER

Page 262 of 343

WHEREFORE, it is respectfully prayed that no further action be taken by this Honorable Court on the foregoing
petitions, that the instant proceedings be declared CLOSED and TERMINATED, and that an Order be rendered
dismissing the above-referenced cases with prejudice.

In the above Joint Manifestation and Motion, respondent Chiok was not represented by his counsel of record,
Cruz Durian Alday and Cruz-Matters, but was assisted by Espiritu Vitales Espiritu Law Office, with Atty. Cesar D.
Vitales as signatory, by way of special appearance and assistance.

On June 19, 2013, this Court issued a Resolution requiring petitioner BPI to comment on the Joint Manifestation
and Motion filed by its copetitioners Metrobank, Global Bank, and respondent Chiok. The Resolution reads:

Considering the joint manifestation and motion of petitioners Metropolitan Bank and Trust Company and Global
Business Bank, Inc., and respondent, that after a thorough consideration, they have decided to forego their
respective claims against each other, including past, present and/or contingent, in these cases and praying that
the instant proceedings in G.R. Nos. 172652 and 175394 be declared closed and terminated, the Court resolves to
require petitioner Bank of the Philippine Islands to COMMENT thereon within ten (10) days from notice thereof x x
x.

On September 12, 2013, respondent Chiok, this time assisted by his counsel of record, Cruz Durian Alday & Cruz-
Matters, filed a Motion for Reconsideration of our Resolution dated June 19, 2013. The signatory to the Motion for
Reconsideration, Atty. Angel Cruz, grossly misread our Resolution requiring BPI to comment on the Joint
Manifestation and Motion, and apparently contemplated that we are already granting said Motion. Atty. Cruz
objected to the Joint Manifestation and Motion, labeling the same as tainted with fraud. According to Atty. Cruz,
Espiritu Vitales and Espiritu’s failure to give prior notice to him is in violation of Canon 8 of the Code of
Professional Responsibility. Atty. Cruz prays that Metrobank and Global Bank be ordered to submit a document
of their settlement showing the amounts paid to Chiok, and for the June19, 2013 Resolution of this Court be
reconsidered and set aside.

On October 9, 2013, BPI filed its comment to the Joint Manifestation and Motion, opposing the samefor being an
implied procedural shortcut to a Compromise Agreement. It averred that while the courts encourage parties to
amicably settle cases, such settlements are strictly scrutinized by the courts for approval. BPI also pointed out that
the Joint Manifestation and Motion was not supported by any required appropriate Board Resolution of
Metrobank and Global Bank granting the supposed signatories the authority to enter into a compromise. BPI
prayed that the Joint Manifestation and Motion of Metrobank, Global Bank, and Chiok be denied, and to render a
full Decision on the merits reversing the Decision of the Court of Appeals.

On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s Motion for Reconsideration on behalf of Chiok,
praying that said Motion be expunged from the records for failure of Atty. Cruz to indicate the number and date
of issue of his MCLE Certificate of Compliance or Certificate of Exemption for the immediately preceding
compliance period.

As far as this Court is concerned, the counsel of record of respondent Chiok is still Cruz Durian Alday & Cruz-
Matters. The requisites of a proper substitution of counsel of record are stated and settled in jurisprudence:

No substitution of counsel of record is allowed unless the following essential requisites of a valid substitution of
counsel concur: (1) there must be a written request for substitution; (2) it must be filed with the written consent of
the client; (3) it must be with the written consent of the attorney to be substituted; and (4) in case the consent of
the attorney to be substituted cannot be obtained, there must be at least a proof of notice that the motion for
substitution was served on him in the manner prescribed by the Rules of Court. 29 (Citation omitted.)

Therefore, while we should indeed require Atty. Cruz to indicate the number and date of issue of his MCLE
Certificate of Compliance or Certificate of Exemption for the immediately preceding compliance period, he is
justified in pointing out the violation of Canon 8 30 of the Code of Professional Responsibility, Rule 8.02 of which
provides:

Page 263 of 343

Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon the professional employment of another
lawyer; however, it is the right of any lawyer, without fear or favor, to give proper advice and assistance to those
seeking relief against unfaithful or neglectful counsel.

We should also give weight to the opposition of BPI to the supposed compromise agreement. As stated above,
the consolidated petitions filed by Metrobank, BPI, and Global Bank all assail the Decision of the Court of Appeals
in CA-G.R. CV No. 77508 dated May 5, 2006, and the Resolution on the same case dated November 6, 2006. BPI
itself has a claim against Global Bank, which appear to be intimately related to issues brought forth in the other
consolidated petitions.

Furthermore, the failure of the parties to the Joint Manifestation and Motion to declare with particularity the
terms of their agreement prevents us from approving the same so as to allow it to attain the effect of res judicata.
A judicial compromise is not a mere contract between the parties. Thus, we have held that:

A compromise agreement intended to resolve a matter already under litigation is a judicial compromise. Having
judicial mandate and entered as its determination of the controversy, such judicial compromise has the force and
effect of a judgment. It transcends its identity as a mere contract between the parties, as it becomes a judgment
that is subject to execution in accordance with the Rules of Court. Thus, a compromise agreement that has been
made and duly approved by the court attains the effect and authority of res judicata, although no execution may
be issued unless the agreement receives the approval of the court where the litigation is pending and compliance
with the terms of the agreement is decreed.31 (Citation omitted.)

We are therefore constrained to deny the Joint Manifestation and Motion filed with this Court on May 28, 2013
and to hereby decide the consolidated petitions on their merits.

The Court’s ruling on the merits of these

consolidated petitions

Whether or not payment of manager’s

and cashier’s checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks

The legal effects of a manager’s check and a cashier’s check are the same. A manager’s check, like a cashier’s
check, is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity, and
honor behind its issuance. By its peculiar character and general use in commerce, a manager’s check or a
cashier’s check is regarded substantially to be as good as the money it represents. 32 Thus, the succeeding
discussions and jurisprudence on manager’s checks, unless stated otherwise, are applicable to cashier’s checks,
and vice versa. The RTC effectively ruled that payment of manager’s and cashier’s checks are subject to the
condition that the payee thereof complies with his obligations to the purchaser of the checks:

The dedication of such checks pursuant to specific reciprocal undertakings between their purchasers and payees
authorizes rescission by the former to prevent substantial and material damage to themselves, which authority
includes stopping the payment of the checks.

Moreover, it seems to be fallacious to hold that the unconditional payment of manager’s and cashier’s checks is
the rule. To begin with, both manager’sand cashier’s checks are still subject to regular clearing under the
regulations of the Bangko Sentral ng Pilipinas, a fact borne out by the BSP manual for banks and intermediaries,
which provides, among others, in its Section 1603.1, c, as follows:

xxxx

Page 264 of 343

c. Items for clearing. All checks and documents payable on demand and drawn against a bank/branch, institution
or entity allowed to clear may be exchanged through the Clearing Office inManila and the Regional Clearing
Units in regional clearing centers designated by the Central Bank x x x. 33

The RTC added that since manager’s and cashier’s checks are the subject of regular clearing, they may
consequently be refused for cause by the drawee, which refusal is in fact provided for in Section 20 of the Rule
Book of the PCHC:

Sec. 20 – REGULAR RETURN ITEM PROCEDURE

20.1 Any check/item sent for clearing through the PCHC on which payment should be refused by the Drawee
Bank in accordance with long standing and accepted banking practices, such as but not limited to the fact that:

(a) it bears the forged or unauthorized signature of the drawer(s); or

(b) it is drawn against a closed account; or

(c) it is drawn against insufficient funds; or

(d) payment thereof has been stopped; or

(e) it is post-dated or stale-dated; and

(f) it is a cashier’s/manager’s/treasurer’s check of the drawee which has been materially altered;

shall be returned through the PCHC not later than the next regular clearing for local exchanges and the
acceptance of said return by the Sending Bank shall be mandatory.

It goes without saying that under the aforecited clearing rule[,] the enumeration of causes to return checks is not
exclusive but may include other causes which are consistent with long standing and accepted banking practices.
The reason of plaintiffs can well constitute such a justifiable cause to enjoin payment. 34

The RTC made an error at this point. While indeed, it cannot be said that manager’s and cashier’s checks are pre-
cleared, clearing should not be confused with acceptance. Manager’s and cashier’s checks are still the subject of
clearing to ensure that the same have not been materially altered or otherwise completely counterfeited.
However, manager’s and cashier’s checks are pre-accepted by the mere issuance thereof by the bank, which is
both its drawer and drawee. Thus, while manager’s and cashier’s checks are still subject to clearing, they cannot
be countermanded for being drawn against a closed account, for being drawn against insufficient funds, or for
similar reasons such as a condition not appearing on the face of the check. Long standing and accepted banking
practicesdo not countenance the countermanding of manager’s and cashier’s checks on the basis of a mere
allegation of failure of the payee to comply with its obligations towards the purchaser. On the contrary, the
accepted banking practice is that such checks are as good as cash. Thus, in New Pacific Timber & Supply
Company, Inc. v. Hon. Seneris,35 we held:

It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash.
Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented
by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation.
Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said
certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have
been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment.
It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on
the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it
as money." When the holder procures the check to be certified, "the check operates as an assignment of a part of
Page 265 of 343
the funds to the creditors." Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act
to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent
to a delivery to the creditor in cash in an amount equal to the amount credited to his account" shall apply in this
case. x x x. (Emphases supplied, citations omitted.)

Even more telling is the Court’s pronouncement in Tan v. Court of Appeals, 36 which unequivocally settled the
unconditional nature of the credit created by the issuance of manager’s or cashier’s checks:

A cashier’s check is a primary obligation of the issuing bank and accepted in advanceby its mere issuance. By its
very nature, a cashier’s check is the bank’s order to pay drawn upon itself, committing in effect its total resources,
integrity and honor behind the check. A cashier’s check by its peculiar character and general use in the
commercial world is regarded substantially to be as good asthe money which it represents. In this case, therefore,
PCIB by issuing the check created an unconditional creditin favor of any collecting bank. (Emphases supplied,
citations omitted.)

Furthermore, under the principle of ejusdem generis, where a statute describes things of a particular class or kind
accompanied by words of a generic character, the generic word willusually be limited to things of a similar nature
with those particularly enumerated, unless there be something in the context of the statute which would repel
such inference.37 Thus, any long standing and accepted banking practice which can be considered as a valid
cause to return manager’s or cashier’s checks should be of a similar nature to the enumerated cause applicable to
manager’s or cashier’s checks: material alteration. As stated above, an example ofa similar cause is the
presentation of a counterfeit check.

Whether or not the purchaser of

manager’s and cashier’s checks has the
right to have the checks cancelled by
filing an action for rescission of its
contract with the payee

The Court of Appeals affirmed the order of the RTC for Global Bank and Metrobank to pay Chiok for the amounts
of the subject manager’s and cashier’s checks. However, since it isclear to the appellate court that the payment of
manager’s and cashier’s checks cannot be considered to be subject to the condition the payee thereof complies
with his obligations to the purchaser of the checks, the Court of Appeals provided another legal basis for such
liability – rescission under Article 1191 of the Civil Code:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96, Quezon City is
AFFIRMED with the following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee Wilfred N.
Chiok and defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 and
025939 and Cashier’s Check No. 003380 are ordered cancelled.38

According to the Court of Appeals, while such rescission was not mentioned in Chiok’s Amended Complaint, the
same was evident from his prayer to be declared the legal owner of the proceeds of the subject checks and to be
allowed to withdraw the same. Since rescission creates the obligation to return the things which are the object of
the contract, together with the fruits, the price and the interest, 39 injunctive relief was necessary to restrain the
payment of the subject checks with the end in view of the return of the proceeds to Chiok. 40

Thus, as it was construed by the Court of Appeals, the Amended Complaint of Chiok was in reality an action for
rescission of the contract to buy foreign currency between Chiok and Nuguid. The Court of Appeals then
proceeded to cancel the manager’s and cashier’s checks as a consequence of the granting of the action for
rescission, explaining that "the subject checks would not have been issued were it not for the contract between
Chiok and Nuguid. Therefore, they cannot be disassociated from the contract and given a distinct and exclusive
signification, as the purchase thereof is part and parcel of the series of transactions necessary to consummate the
contract."41
Page 266 of 343
We disagree with the above ruling.

The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the Civil Code, which reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.

The cause of action supplied by the above article, however, is clearly predicated upon the reciprocity of the
obligations of the injured party and the guilty party. Reciprocal obligations are those which arise from the same
cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to be performed simultaneously such that the performance
of one is conditioned upon the simultaneous fulfillment of the other. 42 When Nuguid failed to deliver the agreed
amount to Chiok, the latter had a cause of action against Nuguid to ask for the rescission of their contract. On the
other hand, Chiok did not have a cause of action against Metrobank and Global Bank that would allow him to
rescind the contracts of sale of the manager’s or cashier’s checks, which would have resulted in the crediting of
the amounts thereof back to his accounts.

Otherwise stated, the right of rescission43 under Article 1191 of the Civil Code can only be exercised in accordance
with the principle of relativity of contracts under Article 1131 of the same code, which provides:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights
and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of
law. x x x.

In several cases, this Court has ruled that under the civil law principle of relativity of contracts under Article 1131,
contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he
is aware of such contract and has acted with knowledge thereof. 44 Metrobank and Global Bank are not parties to
the contract to buy foreign currency between Chiok and Nuguid. Therefore, they are not bound by such contract
and cannot be prejudiced by the failure of Nuguid to comply with the terms thereof.

Neither could Chiok be validly granted a writ of injunction against Metrobank and Global Bank to enjoin said
banks from honoring the subject manager’s and cashier’s checks. It is elementary that "(a)n injunction should
never issue when an action for damages would adequately compensate the injuries caused. The very foundation
of the jurisdiction to issue the writ of injunction rests in the fact that the damages caused are irreparable and that
damages would not adequately compensate." 45 Chiok could have and should have proceeded directly against
Nuguid to claim damages for breach of contract and to have the very account where he deposited the subject
checks garnished under Section 7(d)46 and Section 8,47 Rule 57 of the Rules of Court. Instead, Chiok filed an action
to enjoin Metrobank and Global Bank from complying with their primary obligation under checks in which they
are liable as both drawer and drawee.

It is undisputed that Chiok personally deposited the subject manager’s and cashier’s checks to Nuguid’s
account.1âwphi1 If the intention of Chiok was for Nuguid to be allowed to withdraw the proceeds of the checks
after clearing, he could have easily deposited personal checks, instead of going through the trouble of
purchasing manager’s and cashier’s checks. Chiok therefore knew, and actually intended, that Nuguid will be
allowed to immediately withdraw the proceeds of the subject checks. The deposit of the checks which were
practically as good as cash was willingly and voluntarily made by Chiok, without any assurance that Nuguid will
Page 267 of 343
comply with his end of the bargain on the same day. The explanation for such apparently reckless action was
admitted by Chiok in the Amended Complaint itself:

That plaintiff [Chiok] due to the numberof years (five to seven years) of business transactions with defendant
[Nuguid] has reposed utmost trust and confidence on the latterthat their transactions as of June 1995 reaches
millions of pesos. x x x.48 (Emphases supplied.)

As between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who
made it possible by his act of confidence must bear the loss. 49 Evidently, it was the utmost trust and confidence
reposed by Chiok to Nuguid that caused this entire debacle, dragging three banks into the controversy, and
having their resources threatened because of an alleged default in a contract they were not privy to.

Whether or not the peculiar

circumstances of this case justify the
deviation from the general principles on
causes and effects of manager’s and
cashier’s checks

The Court of Appeals, while admitting that the general principles on the causes and effects of manager’s and
cashier’s checks do not allow the countermanding of such checks on the basis of an alleged failure of
consideration of the payee to the purchaser, nevertheless held that the peculiar circumstances of this case justify
a deviation from said general principles, applying the aforementioned case of Mesina. The Court of Appeals held:

At the core of the appeal interposed by the intervenor BPI, as well as the depository banks, Global Bank and
Metrobank, is the issue of whether or not it is legally possible for a purchaser of a Manager’s Check or Cashier’s
Check to stop payment thereon through a court order on the ground of the payee’s alleged breach of
contractual obligation amounting to an absence of consideration therefor.

In view of the peculiar circumstances of this case, and in the interest of substantial justice, We are constrained to
rule in the affirmative.

xxxx

In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its appeal brief, the Supreme Court had the
occasion to rule that general principles on causes and effects of a cashier’s check, i.e., that it cannot be
countermanded in the hands of a holder in due course and that it is a bill of exchange drawn by the bank against
itself, cannot be applied without considering that the bank was aware of facts (in this case, the cashier’s check was
stolen) that would not entitle the payee thereof to collect on the check and, consequently, the bank has the right
to refuse payment when the check is presented by the payee.

While the factual milieu of the Mesinacase is different from the case at bench, the inference drawn therein by the
High Court is nevertheless applicable. The refusal of Nuguid to deliver the dollar equivalent of the three checks in
the amount of $1,022,288.50 in the afternoon of July 5, 1995 amounted to a failure of consideration that would
not entitle Nuguid to collect on the subject checks.

xxxx

Let it be emphasized that in resolving the matter before Us, We do not detract from well-settled concepts and
principles in commercial law regarding the nature, causes and effects of a manager’s check and cashier’s check.
Such checks are primary obligations of the issuing bank and accepted in advance by the mere issuance thereof.
They are a bank’s order to pay drawn upon itself, committing in effect its total resources, integrity, and honor. By
their peculiar character and general use in the commercial world, they are regarded substantially as good as the
money they represent. However, in view of the peculiar circumstances of the case at bench, We are constrained
to set aside the foregoing concepts and principles in favor of the exercise of the right to rescind a contract upon
the failure of consideration thereof.50 (Emphases ours, citations omitted.)
Page 268 of 343
In deviating from general banking principles and disposing the case on the basis of equity, the courts a quo
should have at least ensured that their dispositions were indeed equitable. This Court observes that equity was
not served in the dispositions below wherein Nuguid, the very person found to have violated his contract by not
delivering his dollar obligation, was absolved from his liability, leaving the banks who are not parties to the
contract to suffer the losses of millions of pesos.

The Court of Appeals’ reliance in the 1986 case of Mesina was likewise inappropriate. In Mesina, respondent Jose
Go purchased from Associated Bank a cashier’s check for ₱800,000.00, payable to bearer.51 Jose Go inadvertently
left the check on the top desk of the bank manager

when he left the bank. The bank manager entrusted the check for safekeeping to a certain bank official named
Albert Uy, who then had a certain Alexander Lim as visitor. Uy left his deskto answer a phone call and to go to the
men’s room. When Uy returned to his desk, Lim was gone. Jose Go inquired for his check from Uy, but the check
was nowhereto be found. At the advice of Uy, Jose Go accomplished a Stop Payment Order and executed an
affidavit of loss. Uy reported the loss to the police. Petitioner Marcelo Mesina tried to encash the check with
Prudential Bank, but the check was dishonored by Associated Bank by sending it back to Prudential Bank with the
words "Payment Stopped" stamped on it. When the police asked Mesina how he came to possess the check, he
said it was paid to him by Alexander Lim in a "certain transaction"but refused to elucidate further. Associated
Bank filed an action for Interpleader against Jose Go and Mesina to determine which of them is entitled to the
proceeds of the check. It was in the appeal on said interpleader case that this Court allowed the deviation from
the general principles on cashier’s checks on account of the bank’s awareness of certain facts that would prevent
the payee to collect on the check.

There is no arguing that the peculiar circumstances in Mesina indeed called for such deviation on account of the
drawee bank’s awareness of certain relevant facts. There is, however, no comparable peculiar circumstance in the
case at bar that would justify applying the Mesina disposition. In Mesina, the cashier’s check was stolen while it
was in the possession of the drawee bank. In the case at bar, the manager’s and cashier’s checks were personally
deposited by Chiok in the account of Nuguid. The only knowledge that can be attributed to the drawee banks is
whatever was relayed by Chiok himself when he asked for a Stop Payment Order. Chiok testified on this matter,
to wit:

Q: Now, Mr. witness, since according to you the defendant failed to deliver [this] amount of
₱1,023,288.23 what action have you undertaken to protect yourinterest Mr. witness?

A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in this matter.

Q: Prior to that matter that you soughtthe advise of your lawyer, Atty. Espiritu insofar as the issuing bank
is concerned, namely, Asian Bank, what did you do in order to protect your interest? A: I immediately call
the bank asking them if what is the procedure for stop payment and the bank told me that you have to
secure a court order as soon as possible before the clearing of these checks. 52 (Emphasis supplied.)

Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of the manager’s checks. As such,
Global Bank may not be held liable on account of the knowledge of whatever else Chiok told them when he
asked for the procedure to secure a Stop Payment Order. On the other hand, there was no mention that
Metrobank was ever notified of the alleged failure of consideration. Only Asian Bank was notified of such fact.
Furthermore, the mere allegation of breach on the part of the payee of his personal contract with the purchaser
should not be considered a sufficient cause to immediately nullify such checks, thereby eroding their integrity and
honor as being as good as cash.

In view of all the foregoing, we resolve that Chiok’s complaint should be denied insofar as it prayed for the
withdrawal of the proceeds of the subject manager’s and cashier’s checks. Accordingly, the writ of preliminary
prohibitory injunction enjoining Metrobank and Global Bank from honoring the subject manager’s and cashier’s
checks should be lifted.

Page 269 of 343

Since we have ruled that Chiok cannot claim the amounts of the checks from Metrobank and Global Bank, the
issue concerning the setting off of Global Bank’s judgment debt to Chiok with the outstanding obligations of
Chiok is hereby mooted. We furthermore note that Global Bank had not presented 53 such issue as a counterclaim
in the case at bar, preventing us from ruling on the same.

BPI’s right to the proceeds of the

manager’s checks from Global Bank

While our ruling in Mesinais inapplicable to the case at bar, a much more relevant case as regards the effect of a
Stop Payment Order upon a manager’s check would be Security Bank and Trust Company v. Rizal Commercial
Banking Corporation,54 which was decided by this Court in 2009. In said case, SBTC issued a manager’s check for
₱8 million, payable to "CASH," as proceeds of the loan granted to Guidon Construction and Development
Corporation (GCDC). On the same day, the manager’s check was deposited by Continental Manufacturing
Corporation (CMC) in its current account with Rizal Commercial Banking Corporation (RCBC). RCBC immediately
honored the manager’s check and allowed CMC to withdraw the same. GCDC issued a Stop Payment Order to
SBTC on the next day, claiming that the check was released to a third party by mistake. SBTC dishonored and
returned the manager’s check to RCBC. The check was returned back and forth between the two banks, resulting
in automatic debits and credits in each bank’s clearing balance. RCBC filed a complaint for damages against
SBTC. When the case reached this Court, we held:

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary check but a
manager’s check. A manager’s check is one drawn by a bank’s manager upon the bank itself. It stands on the
same footing as a certified check, which is deemed to have been accepted by the bank that certified it. As the
bank’s own check, a manager’s check becomes the primary obligation of the bank and is accepted in advance by
the act of its issuance.

In this case, RCBC, in immediately crediting the amount of ₱8 million to CMC’s account, relied on the integrity
and honor of the check as it is regarded in commercial transactions. Where the questioned check, which was
payable to"Cash," appeared regular on its face, and the bank found nothing unusual in the transaction, as the
drawer usually issued checks in big amounts made payable to cash, RCBC cannot be faulted in paying the value
of the questioned check.

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No. 2202 dated
December 21, 1979, prohibiting drawings against uncollected deposits. For we must point out that the Central
Bank at that timeissued a Memorandum dated July 9, 1980, which interpreted said Monetary Board Resolution
No. 2202. In its pertinent portion, saidMemorandum reads:

MEMORANDUM TO ALL BANKS

July 9, 1980

For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979 prohibiting, as
a matter of policy, drawing against uncollected deposit effective July 1, 1980, uncollected deposits representing
manager’s/cashier’s/treasurer’schecks, treasury warrants, postal money orders and duly funded "on us" checks
which may be permitted at the discretion of each bank, covers drawings against demand deposits as well as
withdrawals from savings deposits.

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow immediate
drawings on uncollected deposits of manager’s checks, among others. Consequently, RCBC, in allowing the
immediate withdrawal against the subject manager’s check, only exercised a prerogative expressly granted to it
bythe Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the
extraordinary nature of the manager’s check and the relativerights of the parties thereto. SBTC’s liability as drawer
remains the same— by drawing the instrument, it admits the existence of the payee and his then capacity to
Page 270 of 343
indorse; and engages that on due presentment, the instrument will be accepted, or paid, or both, according to its
tenor.55(Emphases supplied, citations omitted.)

As in SBTC, BPI in the case at bar relied on the integrity and honor of the manager’s and cashier’s checks asthey
are regarded in commercial transactions when it immediately credited their amounts to Nuguid’s account.

The Court of Appeals, however, sustained the dismissal of BPI’s complaint-in-intervention to recover the amounts
of the manager’s checks from Global Bank on account of BPI’s failure to prove the supposed withdrawal by
Nuguid of the value of the checks:

BPI’s cause of action against Asian Bank (now Global Bank) is derived from the supposed withdrawal by Nuguid of
the proceeds of the two Manager’s Checks it issued and the refusal of Asian Bank to make good the same. That
the admissions in the pleadings to the effect that Nuguid had withdrawn the said proceeds failed to satisfy the
trial court is understandable. Such withdrawal is anessential fact that, if properly substantiated, would have
defeated Chiok’s right toan injunction. BPI could so easily have presented withdrawal slips or, with Nuguid’s
consent, statements of account orthe passbook itself, which would indubitably show that money actually changed
hands at the crucial period before the issuance of the TRO. But it did not. 56

We disagree with this ruling. As provided for in Section 4, Rule 129 of the Rules of Court, admissions in pleadings
are judicial admissions and do not require proof:

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.

Nuguid has admitted that FEBTC (now BPI) has paid him the value of the subject checks.57 This statement by
Nuguid is certainly against his own interest as he can be held liable for said amounts. Unfortunately, Nuguid
allowed his appeal with the Court of Appeals to lapse, without taking steps to have it reinstated. This course of
action, which is highly unlikely if Nuguid had not withdrawn the value of the manager’s and cashier’s checks
deposited into his account, likewise prevents us from ordering Nuguid to deliver the amounts of the checks to
Chiok. Parties who did not appeal will not be affected by the decision of an appellate court rendered to appealing
parties.58

Another reason given by the Court of Appeals for sustaining the dismissal of BPI’s complaint-in-intervention was
that BPI failed to prove that it was a holder in due course with respect to the manager’s checks. 59

We agree with the finding of the Court of Appeals that BPI is not a holder in due course with respect to
manager’s checks. Said checks were never indorsed by Nuguid to FEBTC, the predecessor-in-interest of BPI, for
the reason that they were deposited by Chiok directly to Nuguid’s account with FEBTC. However, inview of our
ruling that Nuguid has withdrawn the value of the checks from his account, BPI has the rights of an equitable
assignee for value under Section 49 of the Negotiable Instruments Law, which provides:

Section 49. Transfer without indorsement; effect of. – Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the transferee suchtitle as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose
of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when
the indorsement is actually made.

As an equitable assignee, BPI acquires the instrument subject to defenses and equities available among prior
parties60 and, in addition, the right to have the indorsement of Nuguid. Since the checks in question are
manager’s checks, the drawer and the drawee thereof are both Global Bank. Respondent Chiok cannot be
considered a prior party as he is not the check’s drawer, drawee, indorser, payee or indorsee. Global Bank is
consequently primarily liable upon the instrument, and cannot hide behind respondent Chiok’s defenses. As
discussed above, manager’s checks are pre-accepted. By issuing the manager’s check, therefore, Global Bank
committed in effect its total resources, integrity and honor towards its payment. 61
Page 271 of 343
Resultantly, Global Bank should pay BPI the amount of ₱18,455,350.00, representing the aggregate face value
ofMC No. 025935 and MC No. 025939. Since Global Bank was merely following the TRO and preliminary
injunction issued by the RTC, it cannot be held liable for legal interest during the time said amounts are in its
possession. Instead, we are adopting the formulation of the Court of Appeals that the amounts be treated as
savings deposits in Global Bank. The interest rate, however, should not be fixed at 4% as determined by the Court
of Appeals, since said rates have fluctuated since July 7, 1995, the date Global Bank refused to honor the subject
manager’s checks. Thus, Global Bank should pay BPI interest based on the rates it actually paid its depositors
from July 7, 1995 until the finality of this Decision, in accordance with the same compounding rules it applies to its
depositors. The legal rate of6% per annum shall apply after the finality of this Decision. 62

We have to stress that respondent Chiok is not left without recourse. Respondent Chiok’s cause of action to
recover the value of the checks is against Nuguid. Unfortunately, Nuguid allowed his appeal with the Court of
Appeals to lapse, without taking steps tohave it reinstated. As stated above, parties who did not appeal will not
be affected by the decision of the appellate court rendered to appealing parties. 63 Moreover, since Nuguid was
not impleaded as a party to the present consolidated cases, he cannot be bound by our judgment herein.
Respondent Chiok should therefore pursue his remedy against Nuguid in a separate action to recover the
amounts of the checks.

Despite the reversal of the Court of Appeals Decision, the liability of Nuguid therein to respondent Chiok for
attorney’s fees equivalent to 5% of the total amount due remains valid, computed from the amounts stated in
said Decision. This is a consequence of the finality of the Decision of the Court of Appeals with respect to him.

WHEREFORE, the Court resolves to DENY the Joint Manifestation and Motion filed with this Court on May 28,
2013.

The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED. The Decision of the Court of Appeals in CA-
G.R. CV No. 77508 dated May 5, 2006, and the Resolution on the same case dated November 6, 2006 are hereby
REVERSED AND SET ASIDE, and a new one is issued ordering the DENIAL of the Amended Complaint in Civil Case
No. Q-95-24299 in Branch 96 of the Regional Trial Court of Quezon City for lack of merit. The Writ of Preliminary
Prohibitory Injunction enjoining Asian Banking Corporation (now Global Business Bank, Inc.) from honoring MC
No. 025935 and MC No. 025939, and Metropolitan Bank & Trust Company from honoring CC No. 003380, is
hereby LIFTED and SET ASIDE.

Global Business Bank, Inc. is ORDERED TO PAY the Bank of the Philippine Islands, as successor-in-interest of Far
East Bank & Trust Company, the amount of ₱18,455,350.00, representing the aggregate face value of MC No.
025935 and MC No. 025939, with interest based on the rates it actually paid its depositors from July 7, 1995 until
the finality of this Decision, in accordance with the same compounding rules it applies to its depositors.

The petition in G.R. No. 175394 is hereby rendered MOOT.

The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid under the Decision and Resolution of the
Court of Appeals in CAG.R. CV No. 77508 remain VALID and SUBSISTING, computed from the amounts adjudged
by the Court of Appeals, without prejudice to any further action that may be filed by Wilfred N. Chiok.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

G.R. No. 201931, February 11, 2015

DOÑA ADELA1 EXPORT INTERNATIONAL, INC., Petitioner, v. TRADE AND INVESTMENT DEVELOPMENT
CORPORATION (TIDCORP), AND THE BANK OF THE PHILIPPINE ISLANDS (BPI), Respondents.

DECISION
Page 272 of 343
VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
assailing the Decision2 dated November 15, 2011 and the Order3 dated May 14, 2012 of the Regional Trial Court
(RTC) of Mandaluyong City, Branch 211 in SEC Case No. MC06-103 for Voluntary Insolvency. The RTC approved
the Joint Motion to Approve Agreement filed by respondents Trade and Investment Development Corporation of
the Philippines (TIDCORP) and the Bank of the Philippine Islands (BPI). Respondents stipulated in their agreement
that petitioner shall waive its rights to confidentiality under the provisions of the Law on Secrecy of Bank
Deposits and the General Banking Law of 2000.

The facts follow:

On August 23, 2006, petitioner Doña Adela Export International, Inc., (petitioner, for brevity) filed a Petition for
Voluntary Insolvency.4 The case was docketed as SEC Case No. MC06-103 and raffled off to the RTC of
Mandaluyong City, Branch 211.

On August 28, 2006, the RTC, after finding the petition sufficient in form and substance, issued an order declaring
petitioner as insolvent and staying all civil proceedings against petitioner. In the same order, the RTC set the
initial hearing on October 19, 2006.5cralawlawlibrary

Thereafter, Atty. Arlene Gonzales was appointed as receiver. After taking her oath, Atty. Gonzales proceeded to
make the necessary report, engaged appraisers and required the creditors to submit proof of their respective
claims.

On October 22, 2010, Atty. Gonzales filed a Motion for Parties to Enter Into Compromise
Agreement6incorporating therein her proposed terms of compromise, the pertinent portion of which
reads:chanRoblesvirtualLawlibrary

1. The remaining assets of the Petitioner Dona Adela Export Int’l., Inc., (Dona Adela) consists of the
following:

Asset Appraised Value Remarks

1.1 Land P5,616,000 w/ REM to TRC
1.2 Building 6,480,000 w/ REM to TRC
1.3 Sewing machines 942,000 w/o chattel mortgage to TRC (sic)
1.4 Sewing machines 755,000 w/chattel mortgage
1.5 Furnitures and Fixtures w/o appraised value

2.
The detailed list of the abovementioned assets and the corresponding appraised value is attached hereto
as Annex A;

3. The claims of the creditors of Petitioner previously submitted with their respective proofs of claim are
shown below:

NAME OF CREDITOR AMOUNT

Technology Resource Center 29,546,342.45
BPI 11,069,575.82
*TIDCORP
City of Mandaluyong as of 3/25/09 1,061,370.12

4.

*TIDCORP has not yet submitted its peso amount of claim

Page 273 of 343

 xxxx

WHEREFORE, undersigned receiver respectfully proposed for the concerned parties of this (sic) proceedings to
enter into a compromise Agreement under the following terms and conditions:

a. That the remaining assets of the Petitioner mentioned under 1 above be assigned and applied to their
respective claims in the following manner:

a.1. The real estate property mentioned under 1.1 and 1.2 above with real estate mortgage (REM) to
Technology Resource Center (TRC) be assigned and applied to its credit. All costs and expenses for the
transfer of the registration of the said property, including its unpaid real estate taxes due to the City of
Mandaluyong, and cost for cancellation of real estate mortgage shall be borne by TRC.

a.2. For TRC to assign and waive its rights over the sewing machines and equipments under chattel
mortgage to it mentioned under 1.3 above as its share for the administrative costs of this proceedings.

a.3. To assign to BPI and TIDCORP the sewing machines and equipments mentioned under 1.3 and 1.4
above in proportion with their credits.

a.4. All other remaining assets of Petitioner under 1.5 above be assigned to the Court-appointed receiver,
Atty. Arlene T. Gonzales for payment of receiver’s fees.

a.5. All other administrative expenses, if any, shall be for the account of TRC, BPI and TIDCORP, in
proportion to their respective credits.

b. That for the abovementioned purpose mentioned under 3.a. above, the appraisal value of the property
(as appraised by Royal Asia Appraisers which was previously submitted to the Honorable Court) be made
as the basis in determining the value of the properties; and the amount of the claims that will be
approved by this Honorable Court be made as the basis in the determination of the amount of credits
due to the respective creditors.

c. Furthermore, that the Compromise Agreement being proposed herein shall be without prejudice to
rights of the creditors to enforce actions against other debtors who are jointly and solidarily liable with
the petitioner.

d. Finally, that the petitioner, Dona Adela Int’l., Inc., be discharged from its debts to the party-creditors by
virtue of the Compromise Agreement as being proposed herein. 7

On May 26, 2011, petitioner, through its President Epifanio C. Ramos, Jr., and Technology Resource Center (TRC)
entered into a Dacion En Pago by Compromise Agreement8 wherein petitioner agreed to transfer a 351-square
meter parcel of land covered by TCT No. 10027 with existing improvements situated in the Barrio of Jolo,
Mandaluyong City, in favor of TRC in full payment of petitioner’s obligation. The agreement bears the conformity
of Atty. Gonzales as receiver. TRC filed on May 26, 2011 a Compliance, Manifestation and Motion to
Approve Dacion En Pago by Compromise Agreement.9cralawlawlibrary

On August 11, 2011, creditors TIDCORP and BPI also filed a Joint Motion to Approve Agreement 10 which contained
the following terms:chanRoblesvirtualLawlibrary

1. OBLIGATION OF PETITIONER. – The parties agree that the outstanding principal obligation of petitioner
to TIDCORP shall be in the amount of NINE MILLION FORTY-FOUR THOUSAND SEVEN HUNDRED EIGHT
& 15/100 PESOS (P9,044,708.15), while to BPI in the amount of ELEVEN MILLION SIXTY NINE THOUSAND
FIVE HUNDRED SEVENTY FIVE & 82/100 PESOS (P11,069,575.82).

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 2. SETTLEMENT. – TIDCORP and BPI both hereby agree to accept all the machineries in petitioner’s
inventory set aside pursuant to the Motion for Parties to Enter Into Compromise Agreement dated 18
October 2010 filed by the Receiver, Atty. Arlene T. Gonzales. The said machineries valued at THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00) shall be divided equally between TIDCORP and BPI.

3. SETTLEMENT OF CLAIMS. – TIDCORP and BPI hereby agree that acceptance of the abovementioned
settlement shall constitute payment of petitioner’s aforesaid obligation pursuant to Act No. 1956
(Insolvency Act). However, the benefit of payment under the said Insolvency Act shall only be in favor of
petitioner and shall not in any manner affect the claims of TIDCORP and BPI as against its sureties and/or
guarantors.

4. EXPENSES AND TAXES. – All necessary expenses, including but not limited to, fees of the Receiver,
documentation and notarization, as well as all fees incurred or to be incurred in connection to the full
implementation of this Agreement shall be for the account of Mr. Epifanio C. Ramos, Jr.

All taxes and fees incurred or to be incurred including but not limited to gross receipts tax shall be for
the account of the petitioner.

5. WAIVER OF CONFIDENTIALITY. – The petitioner and the members of its Board of Directors shall waive all
rights to confidentiality provided under the provisions of Republic Act No. 1405, as amended, otherwise
known as the Law on Secrecy of Bank Deposits, and Republic Act No. 8791, otherwise known as The
General Banking Law of 2000. Accordingly, the petitioner and the members of its Board of Directors by
these presents grant TIDCORP and BPI access to any deposit or other accounts maintained by them with
any bank.For this purpose, the petitioner and the members of its Board of Directors shall authorize
TIDCORP and BPI to make, sign, execute and deliver any document of whatever kind or nature which
may be necessary or proper to allow them access to such deposits or other accounts.

TIDCORP and BPI shall be further authorized to delegate to any person, who may exercise in their stead,
any or all of the powers and authority herein granted to them or substitute any person in their place to
do and perform said powers and authority.

18. HOLD FREE AND HARMLESS. – The petitioner shall indemnify and hold TIDCORP and BPI, their respective
Board of Directors, and officers free and harmless against any liability or claim of whatever kind or nature
which may arise from, or in connection with, or in relation to this Agreement.11 (Underscoring supplied)

Epifanio Ramos, Jr. filed a Manifestation and Motion to the Proposed Compromise Agreement 12 of TIDCORP and
BPI wherein he stated that petitioner has a personality separate and distinct from its stockholders and officers.
He argued that he cannot be held liable for the expenses and taxes as a consequence of the auction or
distribution/payment of said machineries to the creditors; hence, his name should be deleted as a party to the
Compromise Agreement.

Likewise, Atty. Gonzales filed a Manifestation and Comment (On Dacion En Pago by Compromise Agreement
with TRC and Joint Motion to Approve Agreement of BPI and TIDCORP) with Motion for Payment of
Administrative Expenses and Receiver’s Fees. 13 Atty. Gonzales manifested that she is entitled to payment of
administrative expenses and receiver’s fees in the total amount of P740,200.00. She further stated that it is just
and fair for her to ask her due for services rendered as officer of the Court from TRC who benefitted the most
from the insolvency proceedings; and, that she is waiving the administrative expenses and receiver’s fees due
from TIDCORP and BPI.

In its Comment,14 TRC requested that the receiver’s fee be reduced to P106,000.00. In her Reply,15Atty. Gonzales
said that she will accept the amount of P106,000.00 being offered by TRC.

On November 15, 2011, the RTC rendered the assailed Decision approving the Dacion En Pago by Compromise
Agreement and the Joint Motion to Approve Agreement, to wit:chanRoblesvirtualLawlibrary

Page 275 of 343

WHEREFORE, premises considered, judgment is hereby rendered based on the foregoing exchange of pleadings,
as follows:

1. Finding the aforequoted Dacion En Pago by Compromise Agreement dated May 26, 2011 executed by
and between Dona Adela Export International, Inc., represented by its president Epifanio C. Ramos, Jr.,
and Technology Resource Center, represented by its Director General Dennis L. Cunanan, to be in order
and not contrary to law, morals, good customs, public order or public policy, and the fact that the Court-
Appointed Receiver in her Reply filed on October 24, 2011 intimated her conformity to the Dacion En
Pago by Compromise Agreement, the same is hereby APPROVED and is made the basis of this judgment;

2. As regards the Joint Motion to Approve Agreement dated July 29, 2011, filed by creditors Trade and
Investment Development Corporation of the Philippines and the Bank of the Philippine Islands, with the
exception of paragraph 4 thereof pertaining to Expenses and Taxes, the same is likewise APPROVED, for
the same is not contrary to law, morals, good customs, public order or public policy, and the fact that the
Court-Appointed Receiver in her Reply filed on October 24, 2011 intimated her conformity to said Joint
Motion to Approve Agreement;

3. Pursuant to its Comment filed on October 19, 2011, Technology Resource Center is hereby ordered to pay
the Court-Appointed Receiver, Atty. Arlene T. Gonzales the sum of P106,000.00, representing its
proportionate share of the administrative expenses incurred by the receiver with legal interest from date
of termination of this insolvency proceedings.

Let a copy of this Decision be furnished to the Securities and Exchange Commission who is directed to cause the
removal of petitioner Dona Adela Export International, Inc., from the list of registered legal entities and to make a
report to this Court of its Compliance within fifteen (15) days from said elimination so that the Court could
terminate the instant insolvency proceedings and release the Court-Appointed receiver from her duties and
responsibilities.

SO ORDERED.16
ChanRoblesVirtualawlibrary
Petitioner filed a motion for partial reconsideration 17 and claimed that TIDCORP and BPI’s agreement imposes on
it several obligations such as payment of expenses and taxes and waiver of confidentiality of its bank deposits but
it is not a party and signatory to the said agreement.

In its Order18 dated May 14, 2012, the RTC denied the motion and held that petitioner’s silence and acquiescence
to the joint motion to approve compromise agreement while it was set for hearing by creditors BPI and TIDCORP
is tantamount to admission and acquiescence thereto. There was no objection filed by petitioner to the joint
motion to approve compromise agreement prior to its approval, said the RTC. The RTC also noted that
petitioner’s President attended every hearing of the case but did not interpose any objection to the said motion
when its conditions were being discussed and formulated by the parties and Atty. Gonzales. 19cralawlawlibrary

Hence, this petition.

Petitioner asserts that express and written waiver from the depositor concerned is required by law before any
third person or entity is allowed to examine bank deposits or bank records. According to petitioner, it is not a
party to the compromise agreement between BPI and TIDCORP and its silence or acquiescence is not tantamount
to an admission that binds it to the compromise agreement of the creditors especially the waiver of
confidentiality of bank deposits. Petitioner cites the rule on relativity of contracts which states that contracts can
only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has knowledge thereof. Petitioner also maintains that waivers are not presumed, but must be
clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable explanation.

Respondent BPI counters that petitioner is estopped from questioning the BPI-TIDCORP compromise agreement
because petitioner and its counsel participated in all the proceedings involving the subject compromise
agreement and did not object when the compromise agreement was considered by the RTC.

Page 276 of 343

Respondent TIDCORP contends that the waiver of confidentiality under Republic Act (R.A.) Nos. 1405 and 8791
does not require the express or written consent of the depositor. It is TIDCORP’s position that upon declaration
of insolvency, the insolvency court obtains complete jurisdiction over the insolvent’s property which includes the
authority to issue orders to look into the insolvent’s bank deposits. Since bank deposits are considered debts
owed by the banks to the petitioner, the receiver is empowered to recover them even without petitioner’s express
or written consent, said TIDCORP.

TIDCORP further avers that the BPI-TIDCORP compromise agreement approved by the RTC is binding on
petitioner and its Board of Directors by reason of estoppel. The compromise agreement is not an ordinary
contract. Since it was approved by the insolvency court, the compromise agreement has the force and effect of
judgment; it is immediately executory and not appealable, except for vices of consent or forgery, TIDCORP
concluded.

The main issue for our consideration is whether the petitioner is bound by the provision in the BPI-TIDCORP Joint
Motion to Approve Agreement that petitioner shall waive its rights to confidentiality of its bank deposits under
R.A. No. 1405, as amended, otherwise known as the Law on Secrecy of Bank Deposits and R.A. No. 8791,
otherwise known as The General Banking Law of 2000.

The petition is meritorious.

A judgment rendered on the basis of a compromise agreement between the parties in a civil case is final,
unappealable, and immediately executory. 20cralawlawlibrary

However, if one of the parties claims that his consent was obtained through fraud, mistake, or duress, he must file
a motion with the trial court that approved the compromise agreement to reconsider the judgment and nullify or
set aside said contract on any of the said grounds for annulment of contract within 15 days from notice of
judgment. Under Rule 37, said party can either file a motion for new trial or reconsideration. A party can file a
motion for new trial based on fraud, accident or mistake, excusable negligence, or newly discovered evidence.
On the other hand, a party may decide to seek the recall or modification of the judgment by means of a motion
for reconsideration on the ground that “the decision or final order is contrary to law” if the consent was procured
through fraud, mistake, or duress. Thus, the motion for a new trial or motion for reconsideration is the readily
available remedy for a party to challenge a judgment if the 15-day period from receipt of judgment for taking an
appeal has not yet expired.21cralawlawlibrary

In this case, petitioner sought partial reconsideration of the decision based on compromise agreement assailing
the waiver of confidentiality provision in the Agreement between its two creditors, TIDCORP and BPI, in which
petitioner was not a party. After the trial court denied the motion on the ground of estoppel, petitioner sought a
direct recourse to this Court.

We stress that a direct recourse to this Court from the decisions, final resolutions and orders of the RTC may be
taken where only questions of law are raised or involved. There is a question of law when the doubt or difference
arises as to what the law is on a certain state of facts, which does not call for an examination of the probative
value of the evidence presented by the parties-litigants. On the other hand, there is a question of fact when the
doubt or controversy arises as to the truth or falsity of the alleged facts. Simply put, when there is no dispute as
to fact, the question of whether the conclusion drawn therefrom is correct or not, is a question of
law.22cralawlawlibrary

Petitioner submits the lone question of law on whether the waiver of confidentiality provision in the Agreement
between TIDCORP and BPI is valid despite petitioner not being a party and signatory to the same. According to
petitioner, R.A. No. 1405 requires the express and written consent of the depositor to make the waiver effective.

Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits enacted in 1955, was first amended by
Presidential Decree No. 1792 in 1981 and further amended by R.A. No. 7653 in 1993. It now
reads:chanRoblesvirtualLawlibrary

Page 277 of 343

SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments
in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are
hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by
any person, government official, bureau or office, except when the examination is made in the course of a special
or general examination of a bank and is specifically authorized by the Monetary Board after being satisfied that
there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed
and that it is necessary to look into the deposit to establish such fraud or irregularity, or when the examination is
made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is
for audit purposes only and the results thereof shall be for the exclusive use of the bank, or upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery
or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter
of the litigation.

R.A. No. 1405 provides for exceptions when records of deposits may be disclosed. These are under any of the
following instances: (a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a
competent court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited
or invested is the subject matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act,
the Anti-Money Laundering Council may inquire into a bank account upon order of any competent
court.23cralawlawlibrary

In this case, the Joint Motion to Approve Agreement was executed by BPI and TIDCORP only. There was no
written consent given by petitioner or its representative, Epifanio Ramos, Jr., that petitioner is waiving the
confidentiality of its bank deposits. The provision on the waiver of the confidentiality of petitioner’s bank deposits
was merely inserted in the agreement. It is clear therefore that petitioner is not bound by the said provision since
it was without the express consent of petitioner who was not a party and signatory to the said agreement.

Neither can petitioner be deemed to have given its permission by failure to interpose its objection during the
proceedings. It is an elementary rule that the existence of a waiver must be positively demonstrated since a
waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but
must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and
likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right. Mere
silence on the part of the holder of the right should not be construed as a surrender thereof; the courts must
indulge every reasonable presumption against the existence and validity of such waiver. 24cralawlawlibrary

In addition, considering that petitioner was already declared insolvent by the RTC, all its property, assets and
belongings were ordered delivered to the appointed receiver or assignee. Thus, in the order of the RTC
appointing Atty. Gonzales as receiver, petitioner was directed to assign and convey to Atty. Gonzales all its real
and personal property, monies, estate and effects with all the deeds, books and papers relating
thereto,25 pursuant to Section 3226 of the Insolvency Law.27 Such assignment shall operate to vest in the assignee
all of the estate of the insolvent debtor not exempt by law from execution. 28 Corollarily, the stipulation in the Joint
Motion to Approve Compromise Agreement that petitioner waives its right to confidentiality of its bank deposits
requires the approval and conformity of Atty. Gonzales as receiver since all the property, money, estate and
effects of petitioner have been assigned and conveyed to her 29and she has the right to recover all the estate,
assets, debts and claims belonging to or due to the insolvent debtor.30cralawlawlibrary

While it was Atty. Gonzales who filed the Motion for Parties to Enter Into Compromise Agreement, she did not
sign or approve the Joint Motion to Approve Agreement submitted by TIDCORP and BPI. In her Manifestation
and Comment (on Dacion En Pago by Compromise Agreement with TRC and Joint Motion to Approve
Agreement of BPI and TIDCORP) there is no showing that Atty. Gonzales signified her conformity to the waiver of
confidentiality of petitioner’s bank deposits. Atty. Gonzales stated thus:chanRoblesvirtualLawlibrary

13. COMPROMISE AGREEMENT OF TIDCORP AND BPI

The undersigned receiver is in conformity with the compromise agreement of TIDCORP and BPI, attached hereto
as Annex C, which they submitted to this Honorable Court under the abovementioned Joint Motion in so far as

Page 278 of 343

the sharing scheme of the sewing machine inventories of Dona Adela is concerned. However, the undersigned
receiver has the following comments on the other provisions of the said compromise agreement:
cralawred
xxxx

13.2. The undersigned receiver reiterates that Dona Adela has no cash or other assets to source payment for
expenses and taxes provided under no. 4 of the Joint Motion to Approve Agreement. In fact, except for the
amount of P5,000.00 she initially asked for administrative expenses and the appraisal fees for the assets of
Dona Adela advanced by MR. EPIFANIO RAMOS, she has been shouldering all the administrative expenses
of this insolvency proceedings.

xxxx
21. As also mentioned under 13.2. above, Dona Adela has no cash to source payment for the abovementioned
administrative expenses and receiver’s fees, and its assets, which should have been the source for payment for
administrative expenses and receiver’s fees before the distribution to the creditors, have already been assigned to
the creditors by compromise agreement.

22. After considering its savings from foreclosure expenses, sheriff’s fees and other related expenses had it
pursued foreclosure proceedings, it is just fair for the undersigned receiver to ask her due for services rendered
as officer of this Honorable Court from TRC who benefitted the most from the insolvency proceedings. 31
(Emphasis ours)

Clearly, the waiver of confidentiality of petitioner’s bank deposits in the BPI-TIDCORP Joint Motion to Approve
Agreement lacks the required written consent of petitioner and conformity of the receiver. We, thus, hold that
petitioner is not bound by the said provision.

It is basic in law that a compromise agreement, as a contract, is binding only upon the parties to the compromise,
and not upon non-parties. This is the doctrine of relativity of contracts. 32 The rule is based on Article 1311 (1) of
the Civil Code which provides that “contracts take effect only between the parties, their assigns and heirs x x
x.”33 The sound reason for the exclusion of non-parties to an agreement is the absence of a vinculum or juridical
tie which is the efficient cause for the establishment of an obligation. 34Consistent with this principle, a judgment
based entirely on a compromise agreement is binding only on the parties to the compromise the court approved,
and not upon the parties who did not take part in the compromise agreement and in the proceedings leading to
its submission and approval by the court. Otherwise stated, a court judgment made solely on the basis of a
compromise agreement binds only the parties to the compromise, and cannot bind a party litigant who did not
take part in the compromise agreement.35cralawlawlibrary

WHEREFORE, premises considered, the petition is hereby GRANTED. The second paragraph of the November 15,
2011 Decision of the Regional Trial Court of Mandaluyong City, Branch 211, in SEC Case No. MC06-103 is
hereby MODIFIED to read as follows:chanRoblesvirtualLawlibrary

2. As regards the Joint Motion to Approve Agreement dated July 29, 2011, filed by creditors Trade and Investment
Development Corporation of the Philippines and the Bank of the Philippine Islands, with the exception of
paragraph 4 and paragraph 5 thereof pertaining to Expenses and Taxes and Waiver of Confidentiality, the same is
likewise APPROVED, for the same is not contrary to law, morals, good customs, public order or public policy, and
the fact that the Court-Appointed Receiver in her Reply filed on October 24, 2011 intimated her conformity to said
Joint Motion to Approve Agreement.

No costs.

SO ORDERED.chanroblesvirtuallawlibrary

INTELLECTUAL PROPERTY

Page 279 of 343

G.R. No. 190706 July 21, 2014

SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND TOWER CORPORATION) and SHANG
PROPERTIES, INC. (formerly EDSA PROPERTIES HOLDINGS, INC.), Petitioners,
vs.
ST. FRANCIS DEVELOPMENT CORPORATION, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari 1 is the Decision2 dated December 18, 2009 of the Court of Appeals
(CA) in CA-G.R. SP No. 105425 which affirmed with modification the Decision 3 dated September 3, 2008 of the
Intellectual Property Office (IPO) Director-General. The CA: (a) affirmed the denial of the application for
registration of the mark "ST. FRANCIS TOWERS" filed by petitioners Shang Properties Realty Corporation and
Shang Properties, Inc. (petitioners); ( b) found petitioners to have committed unfair competition for using the
marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE"; (c) ordered petitioners to cease
and desist from using "ST. FRANCIS" singly or as part of a composite mark; and (d) ordered petitioners to jointly
and severally pay respondent St. Francis Square Development Corporation (respondent) a fine in the amount of
₱200,000.00.

The Facts

Respondent – a domestic corporation engaged in the real estate business and the developer of the St. Francis
Square Commercial Center, built sometime in 1992, located at Ortigas Center, Mandaluyong City, Metro Manila
(Ortigas Center)4 – filed separate complaints against petitioners before the IPO - Bureau of Legal Affairs (BLA),
namely: (a) an intellectual property violation case for unfair competition, false or fraudulent declaration, and
damages arising from petitioners’ use and filing of applications for the registration of the marks "THE ST.
FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE," docketed as IPV Case No. 10-2005-00030 (IPV
Case); and (b) an inter partes case opposing the petitioners’ application for registration of the mark "THE ST.
FRANCIS TOWERS" for use relative to the latter’s business, particularly the construction of permanent buildings or
structures for residential and office purposes, docketed as Inter PartesCase No. 14-2006-00098 (St. Francis Towers
IP Case); and (c) an inter partes case opposing the petitioners’ application for registration of the mark "THE ST.
FRANCIS SHANGRI-LA PLACE," docketed as IPC No. 14-2007-00218 (St. Francis Shangri-La IP Case).5

In its complaints, respondent alleged that it has used the mark "ST. FRANCIS" to identify its numerous property
development projects located at Ortigas Center, such as the aforementioned St. Francis Square Commercial
Center, a shopping mall called the "St. Francis Square," and a mixed-use realty project plan thatincludes the St.
Francis Towers. Respondent added that as a result of its continuous use of the mark "ST. FRANCIS" in its real
estate business,it has gained substantial goodwill with the public that consumers and traders closely identify the
said mark with its property development projects. Accordingly, respondent claimed that petitioners could not
have the mark "THE ST. FRANCIS TOWERS" registered in their names, and that petitioners’ use of the marks "THE
ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE" in their own real estate development projects
constitutes unfair competition as well as false or fraudulent declaration. 6

Petitioners denied committing unfair competition and false or fraudulent declaration, maintaining that they could
register the mark "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE" under their names.
They contended that respondent is barred from claiming ownership and exclusive use ofthe mark "ST. FRANCIS"
because the same is geographically descriptive ofthe goods or services for which it is intended to be used. 7 This is
because respondent’s as well as petitioners’ real estate development projects are locatedalong the streets
bearing the name "St. Francis," particularly, St. FrancisAvenue and St. Francis Street (now known as Bank
Drive),8 both within the vicinity of the Ortigas Center.

The BLA Rulings

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On December 19, 2006, the BLA rendered a Decision 9 in the IPV Case, and found that petitioners committed acts
of unfair competition against respondent by its use of the mark "THE ST. FRANCIS TOWERS" but not with its use
of the mark "THE ST. FRANCIS SHANGRI-LA PLACE." It, however, refused to award damages in the latter’s favor,
considering that there was no evidence presented to substantiate the amount of damages it suffered due to the
former’s acts. The BLA found that "ST. FRANCIS," being a name of a Catholic saint, may be considered as an
arbitrary mark capable of registration when used in real estate development projects as the name has no direct
connection or significance when used in association with real estate. The BLA neither deemed "ST. FRANCIS" as a
geographically descriptive mark, opiningthat there is no specific lifestyle, aura, quality or characteristic that the
real estate projects possess except for the fact that they are located along St. Francis Avenueand St. Francis Street
(now known as Bank Drive), Ortigas Center. In this light, the BLA found that while respondent’s use of the mark
"ST. FRANCIS" has not attained exclusivity considering that there are other real estate development projects
bearing the name "St. Francis" in other areas,10 it must nevertheless be pointed out that respondent has been
known to be the only real estate firm to transact business using such name within the Ortigas Center vicinity.
Accordingly, the BLA considered respondent to have gained goodwill and reputation for its mark, which therefore
entitles it to protection against the use by other persons, at least, to those doing business within the Ortigas
Center.11

Meanwhile, on March 28, 2007, the BLA rendered a Decision 12 in the St. Francis Towers IP Case, denying
petitioners’ application for registration of the mark "THE ST. FRANCIS TOWERS." Excluding the word "TOWERS" in
view of petitioners’ disclaimer thereof, the BLA ruled that petitioners cannot register the mark "THE ST. FRANCIS"
since it is confusingly similar to respondent’s"ST. FRANCIS" marks which are registered with the Department of
Trade and Industry(DTI). It held that respondent had a better right over the use of the mark "ST. FRANCIS"
because of the latter’s appropriation and continuous usage thereof for a long period of time. 13 A little over a year
after, or on March 31, 2008, the BLA then rendered a Decision14 in the St. Francis Shangri-La IP Case, allowing
petitioners’ application for registration of the mark "THE ST. FRANCIS SHANGRI-LA PLACE." It found that
respondent cannot preclude petitioners from using the mark "ST. FRANCIS" as the records show that the former’s
use thereof had not been attended with exclusivity. More importantly, it found that petitioners had adequately
appended the word "Shangri-La" to its composite mark to distinguish it from that of respondent, in which case,
the former had removed any likelihood of confusion that may arise from the contemporaneous use by both
parties of the mark "ST. FRANCIS."

Both parties appealed the decision in the IPV Case, while petitioners appealed the decision in the St. Francis
Towers IP Case. Due to the identity of the parties and issues involved, the IPO Director-General ordered the
consolidation of the separate appeals. 15 Records are, however, bereft of any showing that the decision in the St.
Francis Shangri-La IP Casewas appealed by either party and, thus, is deemed to have lapsed into finality.

The IPO Director-General Ruling

In a Decision16 dated September 3, 2008, then IPO Director-General Adrian S. Cristobal, Jr. affirmedthe rulings of
the BLA that: (a) petitioners cannot register the mark "THEST. FRANCIS TOWERS"; and (b) petitioners are not
guilty of unfair competition in its use of the mark "THE ST. FRANCIS SHANGRI-LA PLACE." However, the IPO
DirectorGeneral reversed the BLA’s findingthat petitioners committed unfair competition through their use of the
mark "THE ST. FRANCIS TOWERS," thus dismissing such charge. He foundthat respondent could not be entitled
to the exclusive use of the mark "ST. FRANCIS," even at least to the locality where it conducts its business,
because it is a geographically descriptive mark, considering that it was petitioners’ as well as respondent’s
intention to use the mark "ST. FRANCIS"in order to identify, or at least associate, their real estate development
projects/businesses with the place or location where they are situated/conducted, particularly, St. Francis Avenue
and St. Francis Street (now known as Bank Drive), Ortigas Center. He further opined that respondent’s registration
of the name "ST. FRANCIS" with the DTI is irrelevant since what should be controlling are the trademark
registrations with the IPO itself.17 Also, the IPO Director-General held that since the parties are both engaged in
the real estate business, it would be "hard to imagine that a prospective buyer will be enticed to buy, rent or
purchase [petitioners’] goods or servicesbelieving that this is owned by [respondent] simply because of the name
‘ST. FRANCIS.’ The prospective buyer would necessarily discuss things with the representatives of [petitioners] and
would readily know that this does not belong to [respondent]." 18

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Disagreeing solely with the IPO Director-General’s ruling on the issue of unfair competition (the bone of
contention in the IPV Case), respondent elevated the sameto the CA.

In contrast, records do not show that either party appealed the IPO Director-General’s ruling on the issue ofthe
registrability of the mark "THE ST. FRANCIS TOWERS" (the bone of contention in the St. Francis Towers IP Case).
As such, said pronouncement isalso deemed to have lapsed into finality.

The CA Ruling

In a Decision19 dated December 18, 2009, the CA found petitioners guilty of unfair competition not only
withrespect to their use of the mark "THE ST. FRANCIS TOWERS" but alsoof the mark "THE ST. FRANCIS
SHANGRI-LA PLACE." Accordingly, itordered petitioners to cease and desist from using "ST. FRANCIS" singly or as
part of a composite mark, as well as to jointly and severally pay respondent a fine in the amount of ₱200,000.00.

The CA did not adhere to the IPO Director-General’s finding that the mark "ST. FRANCIS" is geographically
descriptive, and ruled that respondent – which has exclusively and continuously used the mark "ST. FRANCIS" for
more than a decade, and,hence, gained substantial goodwill and reputation thereby – is very muchentitled to be
protected against the indiscriminate usage by other companies of the trademark/name it has so painstakingly
tried to establish and maintain. Further, the CA stated that even on the assumption that "ST. FRANCIS" was
indeed a geographically descriptive mark, adequateprotection must still begiven to respondent pursuant to the
Doctrine of Secondary Meaning.20

Dissatisfied, petitioners filed the present petition.

The Issue Before the Court

With the decisions in both Inter PartesCases having lapsed into finality, the sole issue thus left for the Court’s
resolution is whether or not petitioners are guilty of unfair competition in using the marks "THE ST. FRANCIS
TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE."

The Court’s Ruling

The petition is meritorious.

Section 168 of Republic Act No. 8293,21 otherwise known as the "Intellectual Property Code of the Philippines" (IP
Code), provides for the rules and regulations on unfair competition.

To begin, Section 168.1 qualifies who is entitled to protection against unfair competition. It states that "[a]person
who has identified in the mind of the public the goods he manufacturesor deals in, his business or services from
those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said
goods, business or services so identified, which will be protected inthe same manner as other property rights."

Section 168.2proceeds to the core of the provision, describing forthwith who may be found guilty of and subject
to an action of unfair competition – that is, "[a]ny person who shall employ deception or any other means
contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his
business, or services for those of the one having established such goodwill, or who shall commit any acts
calculated to produce said result x x x."

Without limiting its generality, Section 168.3goes on to specify examples of acts which are considered as
constitutive of unfair competition, viz.:

168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the
following shall be deemed guilty of unfair competition:

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 (a) Any person who is selling his goods and gives them the general appearance of goods of another
manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which
they are contained, or the devices or words thereon, or in any other feature of their appearance, which
would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or
dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such
appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent
vendor ofsuch goods or any agent of any vendor engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated to induce the
false belief that such person is offering the service of another who has identified such services in the
mind of the public; or

(c) Any person who shall make any false statement in the course of trade or who shall commit any other
act contrary to good faith of a nature calculated to discredit the goods, business or services of another.

Finally, Section 168.4 dwells on a matter of procedure by stating that the "[t]he remedies provided by Sections
156,22157,23 and 16124 shall apply mutatis mutandis."

The statutory attribution of the unfair competition concept is wellsupplemented by jurisprudential

pronouncements. In the recent case of Republic Gas Corporation v. Petron Corporation, 25 the Court has echoed
the classic definition of the term which is "‘the passing off (or palming off) or attempting to pass off upon the
public of the goods or business of one person as the goods or business of another with the end and probable
effect of deceiving the public.’ Passing off (or palming off) takes place where the defendant, by imitative devices
on the general appearance of the goods, misleads prospective purchasers into buying his merchandise under the
impression that they are buying that of his competitors. [In other words], the defendant gives his goods the
general appearance of the goods of his competitor with the intention of deceiving the publicthat the goods are
those of his competitor."26The "true test" of unfair competition has thus been "whether the acts of the defendant
have the intent of deceiving or are calculated to deceive the ordinary buyer making his purchases under the
ordinary conditions of theparticular trade to which the controversy relates." Based on the foregoing, it is therefore
essential to prove the existence of fraud, or the intent to deceive, actual or probable, 27 determined through a
judicious scrutiny of the factual circumstances attendant to a particular case. 28

Here, the Court finds the element of fraud to be wanting; hence, there can be no unfair competition. The
CA’scontrary conclusion was faultily premised on its impression that respondenthad the right to the exclusive use
of the mark "ST. FRANCIS," for which the latter had purportedly established considerable goodwill. What the CA
appears to have disregarded or been mistaken in its disquisition, however, is the geographicallydescriptive nature
of the mark "ST. FRANCIS" which thus bars its exclusive appropriability, unless a secondary meaning is acquired.
As deftly explained in the U.S. case of Great Southern Bank v. First Southern Bank: 29 "[d]escriptive geographical
terms are inthe ‘public domain’ in the sense that every seller should have the right to inform customers of the
geographical origin of his goods. A ‘geographically descriptive term’ is any noun or adjective that designates
geographical location and would tend to be regarded by buyers as descriptive of the geographic location of
origin of the goods or services. A geographically descriptive term can indicate any geographic location on earth,
such as continents, nations, regions, states, cities, streets and addresses, areas of cities, rivers, and any other
location referred to by a recognized name. In order to determine whether or not the geographic term in question
is descriptively used, the following question is relevant: (1) Is the mark the name of the place or region from which
the goods actually come? If the answer is yes, then the geographic term is probably used in a descriptive sense,
and secondary meaning is required for protection." 30

In Burke-Parsons-Bowlby Corporation v. Appalachian Log Homes, Inc., 31 it was held that secondary meaningis
established when a descriptive mark no longer causes the public to associate the goods with a particular place,
but to associate the goods with a particular source.In other words, it is not enough that a geographically-
descriptive mark partakes of the name of a place known generally to the public to be denied registration as it is
also necessary to show that the public would make a goods/place association – that is, to believe that the goods
for which the mark is sought to be registered originatein that place. 1âwphi1 To hold sucha belief, it is necessary,
of course, that the purchasers perceive the mark as a place name, from which the question of obscurity or

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remoteness then comes to the fore.32The more a geographical area is obscure and remote, it becomes less likely
that the public shall have a goods/place association with such area and thus, the mark may not be deemed as
geographically descriptive. However, where there is no genuine issue that the geographical significance of a term
is its primary significanceand where the geographical place is neither obscure nor remote, a public association of
the goods with the place may ordinarily be presumed from the fact that the applicant’s own goods come from
the geographical place named in the mark.33

Under Section 123.234 of the IP Code, specific requirements have to be met in order to conclude that a
geographically-descriptive mark has acquired secondary meaning, to wit: (a) the secondary meaning must have
arisen as a result of substantial commercial use of a mark in the Philippines; (b) such use must result in the
distinctiveness of the mark insofar as the goods or theproducts are concerned; and (c) proof of substantially
exclusive and continuous commercial use in the Philippines for five (5) years beforethe date on which the claim of
distinctiveness is made. Unless secondary meaning has been established, a geographically-descriptive mark,
dueto its general public domain classification, is perceptibly disqualified from trademark registration. Section
123.1(j) of the IP Code states this rule as follows:

SEC. 123. Registrability. –

123.1 A mark cannot be registered if it:

xxxx

(j) Consists exclusively of signs orof indications that may serve in trade to designate the kind, quality, quantity,
intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or
other characteristics of the goods or services; (Emphasis supplied) x x x x

Cognizant of the foregoing, the Court disagrees with the CA that petitioners committed unfair competition due
to the mistaken notion that petitioner had established goodwill for the mark "ST. FRANCIS" precisely because said
circumstance, by and of itself, does not equateto fraud under the parameters of Section 168 of the IP Code as
above-cited. In fact, the records are bereft of any showing thatpetitioners gave their goods/services the general
appearance that it was respondent which was offering the same to the public. Neither did petitioners employ any
means to induce the public towards a false belief that it was offering respondent’s goods/services. Nor did
petitioners make any false statement or commit acts tending to discredit the goods/services offered by
respondent. Accordingly, the element of fraud which is the core of unfair competition had not been established.

Besides, respondent was not able toprove its compliance with the requirements stated in Section 123.2 of the IP
Code to be able to conclude that it acquired a secondary meaning – and, thereby, an exclusive right – to the "ST.
FRANCIS" mark, which is, as the IPO Director-General correctly pointed out, geographically-descriptive of the
location in which its realty developments have been built, i.e., St. Francis Avenue and St. Francis Street (now
known as "Bank Drive"). Verily, records would reveal that while it is true that respondent had been using the mark
"ST. FRANCIS" since 1992, its use thereof has been merely confined to its realty projects within the Ortigas Center,
as specifically mentioned.As its use of the mark is clearly limited to a certain locality, it cannot be said thatthere
was substantial commercial use of the same recognizedall throughout the country. Neither is there any showing
of a mental recognition in buyers’ and potential buyers’ minds that products connected with the mark "ST.
FRANCIS" are associated with the same source 35 – that is, the enterprise of respondent. Thus, absent any showing
that there exists a clear goods/service-association between the realty projects located in the aforesaid area and
herein respondent as the developer thereof, the latter cannot besaid to have acquired a secondary meaning as to
its use of the "ST. FRANCIS" mark.

In fact, even on the assumption that secondary meaning had been acquired, said finding only accords
respondents protectional qualification under Section 168.1 of the IP Code as above quoted. Again, this does not
automatically trigger the concurrence of the fraud element required under Section 168.2 of the IP Code, as
exemplified by the acts mentioned in Section 168.3 of the same. Ultimately, as earlier stated, there can be no
unfair competition without this element. In this respect, considering too the notoriety of the Shangri-La brand in
the real estate industry which dilutes petitioners' propensity to merely ride on respondent's goodwill, the more
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reasonable conclusion is that the former's use of the marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS
SHANGRI-LA PLACE" was meant only to identify, or at least associate, their real estate project/s with its
geographical location. As aptly observed by the IPO DirectorGeneral: 36

In the case at hand, the parties are business competitors engaged in real estate or property development,
providing goods and services directly connected thereto. The "goods" or "products" or "services" are real estate
and the goods and the services attached to it or directly related to it, like sale or lease of condominium units,
offices, and commercial spaces, such as restaurants, and other businesses. For these kinds of goods or services
there can be no description of its geographical origin as precise and accurate as that of the name of the place
where they are situated. (Emphasis and underscoring supplied)

Hence, for all the reasons above-discussed, the Court hereby grants the instant petition, and, thus, exonerates
petitioners from the charge of unfair competition in the IPV Case. As the decisions in the Inter Partes Cases were
not appealed, the registrability issues resolved therein are hereby deemed to have attained finality and, therefore,
are now executory.

WHEREFORE, the petition is GRANTED. The Decision dated December 18, 2009 of the Court of Appeals in CA-G.R.
SP No. 105425 is hereby REVERSED and SET ASIDE. Accordingly, the Decision dated September 3, 2008 of the
Intellectual Property Office-Director General is REINSTATED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

WE CONCUR:

G.R. No. 212705 September 10, 2014

ROBERTO CO, Petitioner,

vs.
KENG HUAN JERRY YEUNG and EMMA YEUNG, Respondents.

RESOLUTION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari 1 assailing the Decision2 dated September 16, 2013 and the
Resolution3 dated May 29, 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 93679 which affirmed the
Decision4 dated October 27, 2008 of the Regional Trial Court of Quezon City, Branch 90 (RTC), finding petitioner
Roberto Co (Co), among others, guilty of unfair competition and, thus, liable for damages to respondents Keng
Huan Jerry Yeung and Emma Yeung (Sps. Yeung).

The Facts

At the core of the controversy isthe product Greenstone Medicated Oil Item No. 16 (Greenstone) which is
manufactured by Greenstone Pharmaceutical, a traditional Chinese medicine manufacturing firm based in Hong
Kong and owned by Keng HuanJerry Yeung (Yeung), and is exclusively imported and distributed in the Philippines
by Taka Trading owned by Yeung’s wife, Emma Yeung (Emma). 5

On July 27, 2000, Sps. Yeung filed a civil complaint for trademark infringement and unfair competition before the
RTC against Ling Na Lau, her sister Pinky Lau (the Laus), and Cofor allegedly conspiring in the sale of counterfeit
Greenstone products tothe public. In the complaint, Sps. Yeung averred that on April 24, 2000, Emma’s brother,
Jose Ruivivar III (Ruivivar), bought a bottle of Greenstone from Royal Chinese Drug Store (Royal) in Binondo,
Manila, owned by Ling Na Lau.However, when he used the product, Ruivivar doubted its authenticity considering
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that it had a different smell, and the heat it producedwas not as strong as the original Greenstone he frequently
used. Having been informed by Ruivivar of the same, Yeung, together with his son, John Philip, went to Royal on
May 4, 2000 to investigate the matter, and, there, found seven (7) bottles of counterfeit Greenstone on display for
sale. He was then told by Pinky Lau (Pinky) – the store’s proprietor – thatthe items came from Co of Kiao An
Chinese Drug Store. According to Pinky, Co offered the products on April 28, 2000 as "Tienchi Fong Sap Oil
Greenstone" (Tienchi) which she eventually availed from him. Upon Yeung’s prodding, Pinky wrote a note stating
these events.6

In defense, Co denied having supplied counterfeit items to Royal and maintained that the stocks of Greenstone
came only from Taka Trading. Meanwhile, the Laus denied selling Greenstone and claimed that the seven (7)
items of Tienchi were left by an unidentified male person at the counter of their drug store and that when Yeung
came and threatened to report the matter to the authorities, the items were surrendered to him. As to Pinky’s
note, it was claimed that she was merely forced by Yeung to sign the same. 7

The RTC Ruling

In a Decision8 dated October 27, 2008, the RTC ruled in favor of Sps. Yeung, and accordingly ordered Co and the
Laus to pay Sps. Yeung: (a) ₱300,000.00 as temperate damages; (b) ₱200,000.00 as moral damages; (c)
₱100,000.00 as exemplary damages; (d) ₱100,000.00 as attorney’s fees; and (e) costs of suit. 9

It found that the Sps. Yeung had proven by preponderance of evidence that the Laus and Co committed unfair
competition through their conspiracy to sell counterfeit Greenstone products that resulted in confusion and
deception not only to the ordinary purchaser, like Ruivivar, but also to the public. 10 It, however, did not find the
Laus and Co liable for trademark infringement as there was no showing that the trademark "Greenstone" was
registered at the time the acts complained of occurred, i.e., in May 2000.11 Dissatisfied, the Laus and Co appealed
to the CA. The CA Ruling

In a Decision12 dated September 16, 2013, the CA affirmed the RTC Decision, pointing out that in the matter of
credibility of witnesses, the findings of the trial court are given great weight and the highest degree of
respect.13Accordingly, it sustained the RTC’s finding of unfair competition, considering that Sps. Yeung’s evidence
preponderated over that of the Laus and Co which was observed to be shiftyand contradictory. Resultantly, all
awards of damages in favor of Sps. Yeung were upheld. 14

The Laus and Co respectively moved for reconsideration but were, however, denied in a Resolution 15 dated May
29, 2014, hence, Co filed the instant petition. On the other hand, records are bereft of any showing that the Laus
instituted any appeal before this Court.

The Issue Before the Court

The sole issue for the Court’s resolution is whether or not the CA correctly upheld Co’s liability for unfair
competition.

The Court’s Ruling

The petition is without merit.

The Court’s review of the present case is via a petition for review under Rule 45 of the Rules of Court,which
generally bars any question pertaining to the factual issues raised. The well-settled rule is that questions of fact
are not reviewable in petitionsfor review under Rule 45, subject only to certain exceptions, among them, the lack
of sufficient support in evidence of the trial court’s judgment or the appellate court’s misapprehension of the
adduced facts.16

Co, who mainly interposes a denialof the acts imputed against him, fails to convince the Court that any of the
exceptions exists so as to warrant a review of the findings of facts in this case. Factual findings of the RTC, when
affirmed by the CA, are entitled to great weight and respect by the Court and are deemed final and conclusive
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when supported by the evidence on record. 17 The Court finds that both the RTC and the CA fully considered the
evidence presented by the parties, and have adequately explained the legal and evidentiary reasons in
concluding that Co committed acts of unfair competition.

Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon the public of the
goods or business of one person as the goods or business of another with the end and probable effect of
deceiving the public. This takes place where the defendant gives his goods the general appearance ofthe goods
of his competitor with the intention of deceiving the public that the goods are those of his competitor. 18

Here, it has been established that Coconspired with the Laus in the sale/distribution of counterfeit Greenstone
products to the public, which were even packaged in bottles identical to that of the original, thereby giving rise to
the presumption of fraudulent intent.19 In light of the foregoing definition, it is thus clear that Co, together with
the Laus, committed unfair competition, and should, consequently, beheld liable therefor. To this end, the Court
finds the award of ₱300,000.00 as temperate damages to be appropriate in recognition of the pecuniary loss
suffered by Sps. Yeung, albeit its actual amount cannot, from the nature of the case, as it involves damage to
goodwill, be proved with certainty.20 The awards of moral and exemplary damages, attorney's fees, and costs of
suit are equally sustained for the reasons already fully-explained by the courts a quo in their decisions.

Although liable for unfair competition, the Court deems it apt to clarify that Co was properly exculpated from the
charge of trademark infringement considering that the registration of the trademark "Greenstone" – essential as it
is in a trademark infringement case – was not proven to have existed during the time the acts complained of were
committed, i.e., in May 2000. In this relation, the distinctions between suits for trademark infringement and unfair
competition prove useful: (a) the former is the unauthorized use of a trademark, whereas the latter is the passing
off of one's goods as those of another; (b) fraudulent intent is unnecessary in the former, while it is essential in
the latter; and (c) in the former, prior registration of the trademark is a pre-requisite to the action, while it is not
necessary in the latter.21

WHEREFORE, the petition is DENIED. The Decision dated September 16, 2013 and the Resolution dated May 29,
2014 of the Court of Appeals in CA-G.R. CV No. 93679 are hereby AFFIRMED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

G.R. No. 209843

TAIWAN KOLIN CORPORATION, LTD., Petitioner,

vs.
KOLIN ELECTRONICS CO., INC., Respondent.

DECISION

VELASCO, JR., J.:

Nature of the Case

Before the Court is a petition for review under Rule 45 of the Rules of Court interposed by petitioner Taiwan Kolin
Corporation, Ltd. (Taiwan Kolin), assailing the April 30, 2013 Decision 1 of the Court of Appeals (CA) in CA-G.R. SP
No. 122565 and its subsequent November 6, 2013 Resolution. 2 The assailed issuances effectively denied
petitioner's trademark application for the use of "KOLIN" on its television and DVD players.

The Facts

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On February 29, 1996, Taiwan Kolin filed with the Intellectual Property Office (IPO), then Bureau of Patents,
Trademarks, and Technology Transfer, a trademark application, docketed as Application No. 4-1996-106310, for
the use of "KOLIN" on a combination of goods, including colored televisions, refrigerators, window-type and
split-type air conditioners, electric fans and water dispensers. Said goods allegedly fall under Classes 9, 11, and 21
of the Nice Classification (NCL).

Application No. 4-1996-106310 would eventually be considered abandoned for Taiwan Kolin’s failure to respond
to IPO’s Paper No. 5 requiring it to elect one class of good for its coverage. However, the same application was
subsequently revived through Application Serial No. 4-2002-011002,3 with petitioner electing Class 9 as the
subject of its application, particularly: television sets, cassette recorder, VCD Amplifiers, camcorders and other
audio/video electronic equipment, flat iron, vacuum cleaners, cordless handsets, videophones, facsimile machines,
teleprinters, cellular phones and automatic goods vending machine. The application would in time be duly
published.4

On July 13, 2006, respondent Kolin Electronics Co., Inc. (Kolin Electronics) opposed petitioner’s revived application,
docketed as Inter Partes Case No. 14-2006-00096. As argued, the mark Taiwan Kolin seeks to register is identical,
if not confusingly similar, with its "KOLIN" mark registered on November 23, 2003, covering the following
products under Class 9 of the NCL: automatic voltage regulator, converter, recharger, stereo booster, AC-DC
regulated power supply, step-down transformer, and PA amplified AC-DC.5

To digress a bit, Kolin Electronics’ "KOLIN" registration was, as it turns out, the subject of a prior legal dispute
between the parties in Inter Partes Case No. 14-1998-00050 beforethe IPO. In the said case, Kolin Electronics’ own
application was opposed by Taiwan Kolin, being, as Taiwan Kolin claimed, the prior registrant and user of the
"KOLIN" trademark, having registered the same in Taipei, Taiwan on December 1, 1988. The Bureau of Legal
Affairs of the IPO (BLA-IPO), however, did not accord priority right to Taiwan Kolin’s Taipei registration absent
evidence to prove that it has already used the said mark in the Philippines as early as 1988. On appeal, the IPO
Director General affirmed the BLA-IPO’s Decision. Taiwan Kolin elevated the case to the CA, but without injunctive
relief, Kolin Electronics was able to register the "KOLIN" trademark on November 23, 2003for its
products.6 Subsequently, the CA, on July 31, 2006, affirmed7 the Decision of the Director General.

In answer to respondent’s opposition in Inter Partes Case No. 14-2006-00096, petitioner argued that it should be
accorded the benefits of a foreign-registered mark under Secs. 3 and 131.1 of Republic Act No. 8293, otherwise
known as the Intellectual Property Code of the Philippines (IP Code); 8 that it has already registered the "KOLIN"
mark in the People’s Republic of China, Malaysia and Vietnam, all of which are parties to the Paris Convention for
the Protection of Industrial Property (Paris Convention) and the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS); and that benefits accorded to a well-known mark should be accorded to
petitioner.9

Ruling of the BLA-IPO

By Decision10 dated August 16, 2007, the BLA-IPO denied petitioner’s application disposing as follows:

In view of all the foregoing, the instant Opposition is as, it is hereby SUSTAINED. Accordingly, application bearing
Serial No. 4-1996-106310 for the mark "KOLIN" filed in the name of TAIWAN KOLIN., LTD. on February 29, 1996
for goods falling under Class 09 of the International Classification of Goods such as cassette recorder, VCD,
woofer, amplifiers, camcorders and other audio/video electronic equipment, flat iron, vacuum cleaners, cordless
handsets, videophones, facsimile machines, teleprinters, cellular phones, automatic goods vending machines and
other electronic equipment is hereby REJECTED.

Let the file wrapper of "KOLIN", subject of this case be forwarded to the Bureau of Trademarks (BOT) for
appropriate action in accordance with this Decision.

SO ORDERED.

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Citing Sec. 123(d) of the IP Code,11 the BLA-IPO held that a mark cannot be registered if it is identical with a
registered mark belonging to a different proprietor in respect of the same or closely-related goods. Accordingly,
respondent, as the registered owner of the mark "KOLIN" for goods falling under Class 9 of the NCL, should then
be protected against anyone who impinges on its right, including petitioner who seeks to register an identical
mark to be used on goods also belonging to Class 9 of the NCL.12 The BLA-IPO also noted that there was proof of
actual confusion in the form of consumers writing numerous e-mails to respondent asking for information,
service, and complaints about petitioner’s products. 13

Petitioner moved for reconsideration but the same was denied on January 26, 2009 for lack of merit.14 Thus,
petitioner appealed the above Decision to the Office of the Director General of the IPO.

Ruling of the IPO Director General

On November 23, 2011, the IPO Director General rendered a Decision 15 reversing that of the BLA-IPO in the
following wise:

Wherefore, premises considered, the appeal is hereby GRANTED. The Appellant’s Trademark Application No. 4-
1996-106310 is hereby GIVEN DUE COURSE subject to the use limitation or restriction for the goods "television
and DVD player". Let a copy of this Decision as well as the trademark application and records be furnished and
returned to the Director of the Bureau of Legal Affairs for appropriate action. Further, let the Director of the
Bureau of Trademarks and the library of the Documentation, Information and Technology Transfer Bureau be
furnished a copy of this Decision for information, guidance, and records purposes.

SO ORDERED.

In so ruling, the IPO Director General ratiocinated that product classification alone cannot serve as the decisive
factor in the resolution of whether or not the goods are related and that emphasis should be on the similarity of
the products involved and not on the arbitrary classification or general description of their properties or
characteristics. As held, the mere fact that one person has adopted and used a particular trademark for his goods
does not prevent the adoption and use of the same trademark by others on articles of a different description. 16

Aggrieved, respondent elevated the case to the CA.

Ruling of the Court of Appeals

In its assailed Decision, the CA found for Kolin Electronics, on the strength of the following premises: (a) the mark
sought to be registered by Taiwan Kolin is confusingly similar to the one already registered in favor of Kolin
Electronics; (b) there are no other designs, special shape or easily identifiable earmarks that would differentiate
the products of both competing companies; 17 and (c) the intertwined use of television sets with amplifier, booster
and voltage regulator bolstered the fact that televisions can be considered as within the normal expansion of
Kolin Electronics,18 and is thereby deemed covered by its trademark as explicitly protected under Sec. 138 19 of the
IP Code.20 Resultantly, the CA granted respondent’s appeal thusly:

WHEREFORE, the appeal is GRANTED. The November 23, 2011 Decision of the Director General of the Intellectual
Property Office in Inter Partes Case No. 14-2006-0096 is REVERSED and SET ASIDE. The September 17, 2007
Decision of the Bureau of Legal Affairs of the same office is REINSTATED.

SO ORDERED.

Petitioner moved for reconsideration only to be denied by the CA through its equally assailed November 6, 2013
Resolution. Hence, the instant recourse.

The Issue

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The primordial issue to be resolved boils down to whether or not petitioner is entitled to its trademark
registration of "KOLIN" over its specific goods of television sets and DVD players. Petitioner postulates, in the
main, that its goods are not closely related to those of Kolin Electronics. On the other hand, respondent hinges its
case on the CA’s findings that its and petitioner’s products are closely-related. Thus, granting petitioner’s
application for trademark registration, according to respondent, would cause confusion as to the public.

The Court's Ruling

The petition is impressed with merit.

Identical marks may be registered for

products from the same classification

To bolster its opposition against petitioner’s application to register trademark "KOLIN," respondent maintains that
the element of mark identity argues against approval of such application, quoting the BLA IPO’s ruling in this
regard:21

Indubitably, Respondent-Applicant’s [herein petitioner] mark is identical to the registered mark of herein Opposer
[herein respondent] and the identical mark is used on goods belonging to Class 9 to which Opposer’s goods are
also classified. On this point alone, Respondent-Applicant’s application should already be denied.

The argument is specious.

The parties admit that their respective sets of goods belong to Class 9 of the NCL, which includes the following: 22

Class 9

Scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signalling, checking
(supervision), life-saving and teaching apparatus and instruments; apparatus and instruments for conducting,
switching, transforming, accumulating, regulating or controlling electricity; apparatus for recording, transmission
or reproduction of sound or images; magneticdata carriers, recording discs; compact discs, DVDs and other
digital recording media; mechanisms for coin-operated apparatus; cash registers, calculating machines, data
processing equipment, computers; computer software; fire-extinguishing apparatus.

But mere uniformity in categorization, by itself, does not automatically preclude the registration of what appears
to be an identical mark, if that be the case. In fact, this Court, in a long line of cases, has held that such
circumstance does not necessarily result in any trademark infringement. The survey of jurisprudence cited in
Mighty Corporation v. E. & J Gallo Winery23 is enlightening on this point:

(a) in Acoje Mining Co., Inc. vs. Director of Patents, 24 we ordered the approval of Acoje Mining’s
application for registration of the trademark LOTUS for its soy sauce even though Philippine Refining
Company had prior registration and use of such identical mark for its edible oil which, like soy sauce, also
belonged to Class 47;

(b) in Philippine Refining Co., Inc. vs. Ng Sam and Director of Patents,25 we upheld the Patent Director’s
registration of the same trademark CAMIA for Ng Sam’s ham under Class 47, despite Philippine Refining
Company’s prior trademark registration and actual use of such mark on its lard, butter, cooking oil (all of
which belonged to Class 47), abrasive detergents, polishing materials and soaps;

(c) in Hickok Manufacturing Co., Inc. vs. Court of Appeals and Santos Lim Bun Liong,26 we dismissed
Hickok’s petition to cancel private respondent’s HICKOK trademark registration for its Marikina shoes as
against petitioner’s earlier registration of the same trademark for handkerchiefs, briefs, belts and wallets.

Verily, whether or not the products covered by the trademark sought to be registered by Taiwan Kolin, on the
one hand, and those covered by the prior issued certificate of registration in favor of Kolin Electronics, on the
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other, fall under the same categories in the NCL is not the sole and decisive factor in determining a possible
violation of Kolin Electronics’ intellectual property right should petitioner’s application be granted. It is hornbook
doctrine, as held in the above-cited cases, that emphasis should be on the similarity of the products involved and
not on the arbitrary classification or general description of their properties or characteristics. The mere fact that
one person has adopted and used a trademark on his goods would not, without more, prevent the adoption and
use of the same trademark by others on unrelated articles of a different kind. 27 The CA erred in denying
petitioner’s registration application

Respondent next parlays the idea of relation between products as a factor militating against petitioner’s
application. Citing Esso Standard Eastern, Inc. v. Court of Appeals,28 respondent argues that the goods covered by
petitioner’s application and those covered by its registration are actually related belonging as they do to the
same class or have the same physical characteristics with reference to their form, composition, texture, or quality,
or if they serve the same purpose. Respondent likewise draws parallelisms between the present controversy and
the following cases:29

(a) In Arce & Sons, Inc. vs. Selecta Biscuit Company, 30 biscuits were held related to milk because they
were both food products;

(b) In Chua Che vs. Phil. Patents Office,31 soap and perfume, lipstick and nail polish are held to be
similarly related because they are common household items;

(c) In Ang vs. Teodoro,32 the trademark "Ang Tibay" for shoes and slippers was disallowed to be used for
shirts and pants because they belong to the same general class of goods; and

(d) In Khe vs. Lever Bros. Co.,33 soap and pomade, although noncompetitive, were held to be similar or
belong to the same class, since both are toilet articles.

Respondent avers that Kolin Electronics’ and Taiwan Kolin’s products are closely-related not only because both
fall under Class 9 of the NCL, but mainly because they both relate to electronic products, instruments, apparatus,
or appliances.34 Pushing the point, respondent would argue that Taiwan Kolin and Kolin Electronics’ goods are
inherently similar in that they are all plugged into electric sockets and perform a useful function. 35 Furthermore,
respondent echoes the appellate court’s ratiocination in denying petitioner’s application, viz: 36

Significantly, Kolin Electronics’ goods (automatic voltage regulator; converter; recharger; stereo booster; AC-DC
regulated power supply; step-down transformer; and PA amplified AC-DC) and Taiwan Kolin’s television sets and
DVD players are both classified under class 9 of the NICE agreement. At first glance, it is also evident that all
these goods are generally described as electrical devices. x x x [T]he goods of both Kolin Electronics and Taiwan
Kolin will inevitably be introduced to the public as "KOLIN" products and will be offered for sale in the same
channels of trade. Contrary to Taiwan Kolin’s claim, power supply as well as audio and stereo equipment like
booster and amplifier are not only sold in hardware and electrical shops. These products are commonly found in
appliance stores alongside television sets and DVD players. With the present trend in today’s entertainment of
having a home theater system, it is not unlikely to see a stereo booster, amplifier and automatic voltage regulator
displayed together with the television sets and DVD players. With the intertwined use of these products bearing
the identical "KOLIN" mark, the ordinary intelligent consumer would likely assume that they are produced by the
same manufacturer.

In sum, the intertwined use, the same classification of the products as class 9 under the NICE Agreement, and the
fact that they generally flow through the same channel of trade clearly establish that Taiwan Kolin’s television sets
and DVD players are closely related to Kolin Electronics’ goods. As correctly pointed out by the BLA-IPO, allowing
Taiwan Kolin’s registration would only confuse consumers as to the origin of the products they intend to
purchase. Accordingly, protection should be afforded to Kolin Electronics, as the registered owner of the "KOLIN"
trademark.37(emphasis added)

The CA’s approach and reasoning to arrive at the assailed holding that the approval of petitioner’s application is
likely to cause confusion or deceive fail to persuade.
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a. The products covered by
petitioner’s application and
respondent’s registration are
unrelated

A certificate of trademark registration confers upon the trademark owner the exclusive right to sue those who
have adopted a similar mark not only in connection with the goods or services specified in the certificate, but also
with those that are related thereto.38

In resolving one of the pivotal issues in this case––whether or not the products of the parties involved are
related––the doctrine in Mighty Corporation is authoritative. There, the Court held that the goods should be
tested against several factors before arriving at a sound conclusion on the question of relatedness. Among these
are:

(a) the business (and its location) to which the goods belong;

(b) the class of product to which the goods belong;

(c) the product’s quality, quantity, or size, including the nature of the package, wrapper or container;

(d) the nature and cost of the articles;

(e) the descriptive properties, physical attributes or essential characteristics with reference to their form,
composition, texture or quality;

(f) the purpose of the goods;

(g) whether the article is bought for immediate consumption, that is, day-to-day household items;

(h) the fields of manufacture;

(i) the conditions under which the article is usually purchased; and

(j) the channels of trade through which the goods flow, how they are distributed, marketed, displayed
and sold.39

As mentioned, the classification of the products under the NCL is merely part and parcel of the factors to be
considered in ascertaining whether the goods are related. It is not sufficient to state that the goods involved
herein are electronic products under Class 9 in order to establish relatedness between the goods, for this only
accounts for one of many considerations enumerated in Mighty Corporation. In this case, credence is accorded to
petitioner’s assertions that:40

a. Taiwan Kolin’s goods are classified as home appliances as opposed to Kolin Electronics’ goods which
are power supply and audio equipment accessories;

b. Taiwan Kolin’s television sets and DVD players perform distinct function and purpose from Kolin
Electronics’ power supply and audio equipment; and

c. Taiwan Kolin sells and distributes its various home appliance products on wholesale and to accredited
dealers, whereas Kolin Electronics’ goods are sold and flow through electrical and hardware stores.

Clearly then, it was erroneous for respondent to assume over the CA to conclude that all electronic products are
related and that the coverage of one electronic product necessarily precludes the registration of a similar mark
over another. In this digital age wherein electronic products have not only diversified by leaps and bounds, and

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are geared towards interoperability, it is difficult to assert readily, as respondent simplistically did, that all devices
that require plugging into sockets are necessarily related goods.

It bears to stress at this point that the list of products included in Class 9 41 can be sub-categorized into five (5)
classifications, namely: (1) apparatus and instruments for scientific or research purposes, (2) information
technology and audiovisual equipment, (3) apparatus and devices for controlling the distribution and use of
electricity, (4) optical apparatus and instruments, and (5) safety equipment. 42 From this sub-classification, it
becomes apparent that petitioner’s products, i.e., televisions and DVD players, belong to audio visiual equipment,
while that of respondent, consisting of automatic voltage regulator, converter, recharger, stereo booster, AC-DC
regulated power supply, step-down transformer, and PA amplified AC-DC, generally fall under devices for
controlling the distribution and use of electricity.

b. The ordinarily intelligent

buyer is not likely to be
confused

In trademark cases, particularly in ascertaining whether one trademark is confusingly similar to another, no rigid
set rules can plausible be formulated. Each case must be decided on its merits, with due regard to the goods or
services involved, the usual purchaser’s character and attitude, among others. In such cases, even more than in
any other litigation, precedent must be studied in the light of the facts of a particular case. That is the reason why
in trademark cases, jurisprudential precedents should be applied only to a case if they are specifically in
point.43 For a clearer perspective and as matter of record, the following image on the left 44 is the trademark
applied for by petitioner, while the image juxtaposed to its right 45 is the trademark registered by respondent:

While both competing marks refer to the word "KOLIN" written in upper case letters and in bold font, the Court at
once notes the distinct visual and aural differences between them: Kolin Electronics’ mark is italicized and colored
black while that of Taiwan Kolin is white in pantone red color background. The differing features between the
two, though they may appear minimal, are sufficient to distinguish one brand from the other.

It cannot be stressed enough that the products involved in the case at bar are, generally speaking, various kinds
of electronic products. These are not ordinary consumable household items, like catsup, soy sauce or soap which
are of minimal cost.46 The products of the contending parties are relatively luxury items not easily considered
affordable. Accordingly, the casual buyer is predisposed to be more cautious and discriminating in and would
prefer to mull over his purchase. Confusion and deception, then, is less likely. 47 As further elucidated in Del Monte
Corporation v. Court of Appeals:48

x x x Among these, what essentially determines the attitudes of the purchaser, specifically his inclination to be
cautious, is the cost of the goods. To be sure, a person who buys a box of candies will not exercise as much care
as one who buys an expensive watch. As a general rule, an ordinary buyer does not exercise as much prudence in
buying an article for which he pays a few centavos as he does in purchasing a more valuable thing. Expensive and
valuable items are normally bought only after deliberate, comparative and analytical investigation. But mass
products, low priced articles in wide use, and matters of everyday purchase requiring frequent replacement are
bought by the casual consumer without great care x x x. (emphasis added) Respondent has made much reliance
on Arce & Sons, Chua Che, Ang, and Khe, oblivious that they involved common household items––i.e., biscuits
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and milk, cosmetics, clothes, and toilet articles, respectively–– whereas the extant case involves luxury items not
regularly and inexpensively purchased by the consuming public. In accord with common empirical experience, the
useful lives of televisions and DVD players last for about five (5) years, minimum, making replacement purchases
very infrequent. The same goes true with converters and regulators that are seldom replaced despite the
acquisition of new equipment to be plugged onto it. In addition, the amount the buyer would be parting with
cannot be deemed minimal considering that the price of televisions or DVD players can exceed today’s monthly
minimum wage. In light of these circumstances, it is then expected that the ordinary intelligent buyer would be
more discerning when it comes to deciding which electronic product they are going to purchase, and it is this
standard which this Court applies herein in determining the likelihood of confusion should petitioner’s application
be granted.

To be sure, the extant case is reminiscent of Emerald Garment Manufacturing Corporation v. Court of
Appeals,49wherein the opposing trademarks are that of Emerald Garment Manufacturing Corporation’s "Stylistic
Mr. Lee" and H.D. Lee’s "LEE." In the said case, the appellate court affirmed the decision of the Director of Patents
denying Emerald Garment’s application for registration due to confusing similarity with H.D. Lee’s trademark. This
Court, however, was of a different beat and ruled that there is no confusing similarity between the marks, given
that the products covered by the trademark, i.e., jeans, were, at that time, considered pricey, typically purchased
by intelligent buyers familiar with the products and are more circumspect, and, therefore, would not easily be
deceived. As held:

Finally, in line with the foregoing discussions, more credit should be given to the "ordinary purchaser." Cast in this
particular controversy, the ordinary purchaser is not the "completely unwary consumer" but is the "ordinarily
intelligent buyer" considering the type of product involved.

The definition laid down in Dy Buncio v. Tan Tiao Bok 50 is better suited to the present case. There, the "ordinary
purchaser" was defined as one "accustomed to buy, and therefore to some extent familiar with, the goods in
question. The test of fraudulent simulation is to be found in the likelihood of the deception of some persons in
some measure acquainted with an established design and desirous of purchasing the commodity with which that
design has been associated. The test is not found in the deception, or the possibility of deception, of the person
who knows nothing about the design which has been counterfeited, and who must be indifferent between that
and the other. The simulation, in order to be objectionable, must be such as appears likely to mislead the
ordinary intelligent buyer who has a need to supply and is familiar with the article that he seeks to
purchase."51 (emphasis added)

Consistent with the above ruling, this Court finds that the differences between the two marks, subtle as they may
be, are sufficient to prevent any confusion that may ensue should petitioner’s trademark application be granted.
As held in Esso Standard Eastern, Inc.:52

Respondent court correctly ruled that considering the general appearances of each mark as a whole, the
possibility of any confusion is unlikely. A comparison of the labels of the samples of the goods submitted by the
parties shows a great many differences on the trademarks used. As pointed out by respondent court in its
appealed decision, "(A) witness for the plaintiff, Mr. Buhay, admitted that the color of the ‘ESSO’ used by the
plaintiff for the oval design where the blue word ESSO is contained is the distinct and unique kind of blue. In his
answer to the trial court’s question, Mr. Buhay informed the court that the plaintiff never used its trademark on
any product where the combination of colors is similar to the label of the Esso cigarettes," and "Another witness
for the plaintiff, Mr. Tengco, testified that generally, the plaintiff’s trademark comes all in either red, white, blue or
any combination of the three colors. It is to be pointed out that not even a shade of these colors appears on the
trademark of the appellant’s cigarette. The only color that the appellant uses in its trademark is green."

Even the lower court, which ruled initially for petitioner, found that a "noticeable difference between the brand
ESSO being used by the defendants and the trademark ESSO of the plaintiff is that the former has a rectangular
background, while in that of the plaintiff the word ESSO is enclosed in an oval background."

All told, We are convinced that petitioner's trademark registration not only covers unrelated good, but is also
incapable of deceiving the ordinary intelligent buyer. The ordinary purchaser must be thought of as having, and
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credited with, at least a modicum of intelligence to be able to see the differences between the two trademarks in
question.53

Questions of fact may still be entertained

On a final note, the policy according factual findings of courts a quo great respect, if not finality, is not binding
where they have overlooked, misapprehended, or misapplied any fact or circumstance of weight and
substances.54 So it must be here; the nature of the products involved materially affects the outcome of the instant
case. A reversal of the appellate Court's Decision is then in order.

WHEREFORE, in view of the foregoing, the petition is hereby GRANTED. The Decision and the Resolution of the
Court of Appeals in CA-G.R. SP No. 122565, dated April 30, 2013 and November 6, 2013, respectively, are hereby
REVERSED and SET ASIDE. Accordingly, the Decision of the Intellectual Property Office Director General in Inter
Partes Case No. 14-2006-00096, dated November 23, 2011, is hereby REINSTATED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

SPECIAL LAWS

G.R. No. 184000 September 17, 2014

PUERTO AZUL LAND, INC., Petitioner,

vs.
PACIFIC WIDE REALTY DEVELOPMENT CORPORATION,* Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari 1 are the Decision2 dated February 21, 2008 and the
Resolution3dated July 22, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 92691 which set aside the
Decision4 dated December 13, 2005 of the Regional Trial Court of Manila, Branch 24 (RTC) in Civil Case No. 04-
110914, thereby dismissing the revised rehabilitation plan of petitioner Puerto Azul Land, Inc. (PALI).

The Facts

PALI is a domestic corporation engaged in the business of developing the Puerto Azul Complex located in
Ternate, Cavite into a "satellite city," described as a "self-sufficient and integrated tourist destination community
with residential areas, resort/tourism,and retail commercial centers with recreation areas like golf courses, jungle
trails, and white sand lagoons."5 To finance the full operation of its business, PALI obtained loans in the total
principal amount of 640,225,324.00 from several creditors, among which were East Asia Capital,Export and
Industry Bank (EIB), Philippine National Bank, and Equitable PCI Bank (EPCIB), secured by real estate owned by
PALI and by accommodation mortgagors under a Mortgage Trust Indenture. 6

Foreseeing the impossibility of meeting its debts and obligations to its creditors as they fall due, PALI, on
September 14, 2004, filed a Petition for Suspension of Payments and Rehabilitation 7 before the RTC, docketed as
Civil Case No. 04-110914, attributing its financial difficulties to: (a) the denial by the Philippine Stock Exchangeof its
application for the public listing of its shares of stock which resulted in the loss of potential investors and real
estate buyers; (b) the 1997 Asian financial crisis; and (c) the real estate bubble burst. 8 Attached to PALI’s petition
was its proposed Rehabilitation Plan.9

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On September 17, 2004, the RTC, finding PALI’s petition to be sufficient in form and substance, issued a Stay
Order10 pursuant to Section 6, Rule 4 of the Interim Rules on Corporate Rehabilitation 11 (Interim Rules), among
others, (a) staying the enforcement of all claims against the debtor, its guarantors, and sureties not solidarily
liable with the debtor, (b) prohibiting PALI from making any payment of its liabilities outstanding as of the date of
filing of the petition, (c) prohibiting PALI from selling, encumbering, transferring, or disposing any of its properties
except in the ordinary course ofbusiness, and (d) appointing Mr. Patrick V. Caoile as Rehabilitation Receiver,
conditioned upon his posting of a bond in the amount of ₱1,000,000.00. During the initial hearing, PALI adduced
evidence showing compliance with the jurisdictional requirements. Thereafter, the RTC heard the comments and
opposition of the creditors to the petition and the Rehabilitation Plan.12 Later, creditor EPCIB was substituted by
Cameron Granville Asset Management(SPV-AMC), Inc. (CGAM).13

On April 20, 2005, the Rehabilitation Receiver filed his Rehabilitation Report and
Recommendation,14recommending PALI’s rehabilitation over its dissolution and liquidation, followed by a Revised
Rehabilitation Plan on June 9, 2005.15

The RTC Ruling

In a Decision16 dated December 13, 2005,the RTC approved PALI’s Revised Rehabilitation Plan under the following
terms and conditions:

1. The creditors shall have, as first option, the right to be paid with real estate properties being offered by
the petitioner in dacion en pago, which shall be implemented under the following terms and conditions:

a) The properties offered by the petitioner shall be appraised by three appraisers, one to be
chosen by the petitioner, a second to be chosen by the bank creditors and the third to be
chosen by the Receiver. The average of the appraisals of the three (3) chosen appraisers shall be
the value to be applied in arriving at the dacionvalue of the properties. In case the
dacionamount is less than the total of the secured creditor’s principal obligation, the balance
shall be restructured in accordance with the schedule of payments under option 2, paragraph
(a). In case of excess, the same shall [be] applied in full or partial payment of the accrued interest
on the obligations. The balance of the accrued interest, if any, togetherwith the penalties shall
[be] condoned.

2. Creditors who will not opt for dacion, shall be paid in accordance with the restructuring of the
obligations as recommended by the Receiver as follows:

a) The obligations to secured creditors will be subject to a 50% haircut of the principal, and
repayment shall be semi-annually over a period of 10 years, with 3-year grace period. Accrued
interests and penalties shall be condoned. Interest shall be paid at the rate of 2% p.a. for the first
5 years, and 5% p.a. thereafter until the obligations are fully paid. The petitioner shall allot 50%
of its cash flow available for debt service for secured creditors. Upon completion of payments to
government and employee accounts, the petitioner’s cash flow available for debt service shall be
used until the obligations are fully paid.

b) One half (1/2) of the principal of the petitioner’s unsecured loan obligations to other creditors
shall be settled through non-cash offsetting arrangements, with the balance payable semi-
annually over a period of 10 years, with 3-year grace period, with interest at the rate of 2% p.a.
for the first 5 years and 5% p.a. from the 6th year onwards until the obligations are settled in full.
Accrued interest and penalties shall be condoned.

c) Similarly, one half (1/2) of the petitioner’s obligations to trade creditorsshall be settled through
noncash offsetting arrangements. The cash payments shall be made semi-annually over a period
of 10 years on a pari passu basiswith the bank creditors, without interest, penalties and other
charges of similar kind.17

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Dissatisfied, CGAM filed a petition for review before the CA, docketed as CA-G.R. SP No. 92691, objecting to the
approval of PALI’s Revised Rehabilitation Plan on the following grounds: (a) insufficiency in the substance of the
petition; (b) the Revised Rehabilitation Plan was not approved within 180 days from the date of the initial hearing;
(c) the 50% "haircut" reduction on the principal obligation and the condonation of penalties and interests violated
the constitutional guarantee against nonimpairment of contracts; and (d) the Revised Rehabilitation Plan does not
give due regard to the interests of the secured creditors. 18

CGAM was later substituted by its assignee, herein respondent Pacific Wide Realty Development Corporation
(PWRDC),19 in the proceedings before the CA.

The CA Ruling

In a Decision20 dated February 21, 2008,the CA granted PWRDC’s petition for review and reversed the December
13, 2005 RTC Decision, thereby dismissing PALI’s petition for rehabilitation.

It held that the causes of PALI’s inability to pay its debts were not alleged in the petition with sufficient
particularity as to have allowed the RTC to properly evaluate whether ornot to issue a Stay Order and eventually
approve its rehabilitation.21 It further ruled that when the RTC approved PALI’s Revised Rehabilitation Plan on
December 13, 2005, the mandatory 180-day period allowed under the rules for the approval or disapproval of the
same had already lapsed, warranting the dismissal of the petition for rehabilitation. 22 It also found the 50%
"haircut" reduction on the principal loan and the condonation of penalties and interests to be an impairment of
the parties’ loan agreements.23

PALI moved for reconsideration which the CA denied in a Resolution 24 dated July 22, 2008, prompting the filing
of the instant petition.

PALI invokes a liberal construction of the provisions of the Interim Rules, and cites Sections 5(d), 6(c), and 6(d) of
Presidential Decree No. 902-A whose objectives are to effect a feasible and viable rehabilitation and to give
enough breathing space for the management committee orrehabilitation receiver to make the business viable
anew.25 It also posits that the CA erred in construing the 180-day period under Section 11, Rule 4 of the Interim
Rules to be mandatory, stating that the purpose and intent of the rules should have been considered. 26 Finally, it
asserts that the approved Revised Rehabilitation Plan is neither unreasonable nor prejudicial to the interests of its
creditors, adding that PALI’s rehabilitation is the best way to protect the interests of all parties concerned and its
continued operation remains the only viable and feasible solution to meet the desired objectives.27

Significantly, another PALI creditor,EIB, filed a petition for review before the CA, docketed as CA-G.R. SP No.
92695,28 contesting the same December 13, 2005 RTC Decision. The CA, however, dismissed the petition and
affirmed the aforesaid RTC Decision. Consequently, EIB’s assignee, PWRDC, elevated the matter to the Court,
docketed as G.R. No. 180893, and was consolidated with G.R. No. 178768, a related case also commenced by
PWRDC essentially involving the coverage of the RTC’s Stay Order over the security posted by an
accommodation mortgagor.29

The Court resolved both cases in a Decision 30 dated November 25, 2009, ruling: (a) in G.R. No. 180893, that there
was nothing unreasonable or onerous in PALI’s Revised Rehabilitation Plan nor was there a violation of the non-
impairment clause, in effectupholding the RTC’s approval of PALI’s rehabilitation; 31 and (b) in G.R. No. 178768, that
the RTC committed no reversible error when it removed TCT No. 133164 from the coverage of the Stay Order
since the Interim Rules only covers the suspension of the enforcement of all claims against the debtor, its
guarantors, and sureties not solidarily liable with the mortgagor, and is silent on the enforcement of claims
against accommodation mortgagors.32

The Issue Before the Court

The core issue for resolution is whether or not the CA erred in reversing the December 13, 2005 RTC Decision,
thereby dismissing PALI’s Revised Rehabilitation Plan.

Page 297 of 343

The Court’s Ruling

The Court finds in favor of PALI.

As adverted to earlier, the validity of PALI’s rehabilitation was already raised as an issue by PWRDC and resolved
with finality by the Court in its November 25, 2009 Decision in G.R. No. 180893 (consolidated with G.R. No.
178768). The Court sustained therein the CA’s affirmation of PALI’s Revised Rehabilitation Plan, including those
terms which its creditors had found objectionable, namely, the 50% "haircut" reduction of the principal
obligations and the condonation of accrued interests and penalty charges. The relevant portion of the Court’s
ruling reads:

In G.R. No. 180893, the rehabilitation plan is contested on the ground that the same is unreasonable and results
in the impairment of the obligations of contract. PWRDC contests the following stipulations in PALI’s
rehabilitation plan: fifty percent (50%) reduction of the principal obligation; condonation of the accrued and
substantial interests and penalty charges; repayment over a period of ten years, with minimal interest of two
percent (2%) for the first five years and five percent (5%) for the next five years until fully paid, and only upon
availability of cash flow for debt service.

We find nothing onerous in the terms of PALI’s rehabilitation plan. The Interim Rules on Corporate Rehabilitation
provides for means of execution of the rehabilitation plan, which may include, among others, the conversion of
the debts orany portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or ofthe
controlling interest.

The restructuring of the debts of PALI is part and parcel of its rehabilitation. 1âwphi1 Moreover, per findings offact
of the RTC and as affirmed by the CA, the restructuring of the debts of PALI would not be prejudicial to the
interest of PWRDC as a secured creditor. Enlightening is the observation of the CA in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as found by
the courta quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its creditors at deep discounts
of as much as 85%. Meaning, PALI’s creditors accepted only 15% of their credit’s value. Stated otherwise, if PALI’s
creditors are in a position to accept 15% of their credit’s value, with more reason that they should be able to
accept 50% thereof as full settlement by their debtor. x x x. 33

Since the issue on the validity, as well as regularity of the December 13, 2005 RTC Decision approving PALI’s
Revised Rehabilitation Plan had already been resolved, the Court, in line with the res judicataprinciple, is
constrained to grant the present petition and, consequently, reverse the assailed CA decision.

Res judicata (meaning, a "matter adjudged") is a fundamental principle of law which precludes parties from re-
litigating issues actually litigated and determined by a prior and final judgment. 34 It means that "a final judgment
or decree on the merits by a court of competent jurisdiction is conclusive of the rights of the parties ortheir
privies in all later suits on all points and matters determined in the former suit."35

Res judicatahas two (2) concepts. The first is "bar by prior judgment" in which the judgment or decree of the
court of competent jurisdiction on the merits concludes the litigation between the parties, aswell as their privies,
and constitutes a bar to a new action or suit involving the same cause of action before the same or other tribunal.
The second is "conclusiveness of judgment" in which any right, fact or matter in issue directly adjudicated or
necessarily involved in the determination of an action before a competent court in which judgment is rendered
on the merits is conclusively settled by the judgment therein and cannot again be litigated between the parties
and their privies whether or not the claim, demand, purpose, or subject matter of the two actions is the same. 36

There is a bar by prior judgment where there is identity of parties, subject matter, and causes of actionbetween
the first case where the judgment was rendered and the second case that is sought to be barred. 37 There is
conclusiveness of judgment, on the other hand, where there is identity of parties in the first and second cases, but
no identity of causes of action.38

Page 298 of 343

As may be gleaned from the foregoing antecedents, the present case and G.R. No. 180893 involve the same
parties, i.e., PWRDC and PALI, the same subject matter, i.e., PALI’s rehabilitation, and the same causes of action,
i.e., the alleged violation of PWRDC’s rights as creditor by virtue of the RTC’s approval of PALI’s Revised
Rehabilitation Plan. Thus, with the identity of all three (3) elements present in the previously decided case and this
one, it is then clearthat the principle of res judicatashould heretofore apply. Accordingly, the Court’s November
25, 2009 Decision in G.R. No. 180893 (consolidated with G.R. No. 178768) bars the re-litigation of the issue of the
validity and regularity of the approved Revised Rehabilitation Plan between PWRDC and PALI. As the plan's
validity had already been upheld, PWRDC is now bound by such adverse ruling which had long attained finality.
As a result, the CA Decision opposite to the aforestated Court Decision should be set aside, and the petition
herein be granted. WHEREFORE, the petition is GRANTED. The Decision dated February 21, 2008 and the
Resolution dated July 22, 2008 of the Court of Appeals in CA-G.R. SP No. 92691 are hereby SET ASIDE.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

WE CONCUR:

G.R. No. 195289 September 24, 2014

ROBINSON'S BANK CORPORATION (formerly THE ROY AL BANK OF SCOTLAND [PHILS.], INC.), Petitioner,
vs.
HON. SAMUEL H. GAERLAN, HON. HAKIM S. ABDULWAHID and HON. RICARDO R. ROSARIO, in their capacity as
Associate Justices respectively of the Tenth Division of the Court of Appeals, and TRADE AND INVESTMENT
DEVELOPMENT CORPORATION OF THE PHILIPPINES, Respondents.

DECISION

DEL CASTILLO, J.:

This Petition for Certiorari1 assails the July 19, 2010 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No.
104141, entitled "Trade and Investment Development Corporation of the Philippines, Petitioner, versus World
Grannary Corporation, Respondent," as well as its December 6, 2010 Resolution 3 denying the Motion for
Reconsideration4 of herein petitioner Robinson's Bank Corporation 5 (RBC).

Factual Antecedents

On December 4, 2006, Nation Granary, Inc. (now World Granary 6 Corporation, or WGC) filed a Petition for
Rehabilitation with Prayer for Suspension of Payments, Actions and Proceedings 7 before the Regional Trial Court
(RTC) of Lucena City, which was docketed as Special Proceedings No. 2006-77 and assigned to Branch 57.

WGC is engaged in the business of mechanized bulk handling, transport and storage, warehousing,drying, and
milling of grains. It incurred loans amounting to ₱2.66 billion from RBC and other banks and entities such as
herein private respondent Trade and Investment Development Corporation of the Philippines (TIDCORP). It
appears thatRBC is both a secured and unsecured creditor, 8 while TIDCORP is a secured creditor.9

On December 12, 2006, the RTC issued a Stay Order 10 staying the enforcement of creditors’ claims; prohibiting
WGC from disposing or encumbering its properties and paying its outstanding liabilities; prohibiting its suppliers
from withholding their goods and services; appointing a rehabilitation receiver; and directing creditors and
interested parties to file their respective comments to the Petition.

RBC filed its Opposition11 to the Petition for Rehabilitation.

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In a July 27, 2007 Order,12 the RTC gave due course to the Petition for Rehabilitation and directed the receiverto
evaluate the rehabilitation plan submitted by WGC, and thereafter submit his recommendations thereon.
Accordingly, the receiver submitted his Report withRecommendation 13 dated September 27, 2007, to which RBC
and TIDCORP filed their respective Comments. 14 Apparently, the Reportproposed, among others, a pari passu– or
equal – sharing between the secured and unsecuredcreditors of the proceeds from WGC’s cash flow made
available for debt servicing.15

In its Comment, TIDCORP among others took exception to the proposed pari passusharing, insisting that as a
secured creditor, it should enjoy preference over unsecured creditors, citing law and jurisprudence to the effect
that the law on preference of credits shall be observed inresolving claims against corporations under
rehabilitation.16 It likewise claimed that WGC violated its Indemnity Agreement17 with TIDCORP – which required
that while the agreement subsisted, WGC shall not incur new debts without TIDCORP’s approval 18 – by obtaining
additional loans without the knowledge and consent of the latter.

RBC filed an Opposition19 to TIDCORP’s Comment, arguing pertinently that TIDCORP’s objection to a pari
passusharing of WGC’s cash flow proceeds and insistence on preferential treatment goes against the legal
principle that during rehabilitation, both secured and unsecuredcreditors stand on equal footing, and that it is
only when rehabilitation is nolonger feasible – and liquidation is the remaining option – that secured
creditorsshall enjoy preference over unsecured creditors; 20 that giving preference to TIDCORP would violate the
Stay Order and impair the powers of the receiver; and thatany change in the contractual relations between
TIDCORP and WGC relative to their Indemnity Agreement comes as a necessary consequence of
rehabilitation,which TIDCORP may not be heard to complain.

On June 6, 2008, the RTC issued an Order21 approving WGC’s rehabilitation plan, thus: WHEREFORE, the
Rehabilitation Program submitted as Attachment "A" of the Report with Recommendation (On the Rehabilitation
Program), dated September 27, 2007, of the Rehabilitation Receiver is hereby APPROVED with the following
conditions to form part thereof:

1. that with the exception of the guarantee fees to TIDCORP (also known as PHILEXIM) all obligations of
the petitioner should be settled on a pari-passubasis;

2. that the Rehabilitation Program should include a schedule of the equity infusion in the amount of
Eighty Three Million Pesos;

3. that Petitioner should submit tothe Court, copy furnished the creditors, the schedule of contracts
under negotiations with its prospective clients with informationsas to their status and proposed terms
and conditions within thirty (30) days from receipt of this Order;

4. that Petitioner should submit tothe Court, copy furnished the creditors, a complete inventory of all the
properties it bought using the proceeds from the LC/TR within thirty (30) days from receipt of this Order;
and

5. that the Petitioner should include inthe Rehabilitation Program the repayment terms of the creditors
on record not included therein, among whom is creditor Belmont Agricorp, Inc., furnishing copy thereof
the concerned creditors.

The Petitioner is enjoined to strictlycomply with the provisions of the Rehabilitation Program, performing its
obligations thereunder, and to take all the actions necessary to carry out the program, failing which the Court
shall either upon motion, motu propio, or upon the recommendation of the Rehabilitation Receiver, terminate the
proceedingsas provided for under the Rules.

The Rehabilitation Receiver is directed to strictly monitor the implementation of the program and submit a
quarterly report on the progress thereof.

SO ORDERED.22
Page 300 of 343
Ruling of the Court of Appeals

TIDCORP thus filed CA-G.R. SP No. 104141, which is a Petition for Review23 assailing the above June 6, 2008 Order
on the ground that the trial court’s specific directive for WGC to settle its obligations on a pari passubasis is
contrary to law and jurisprudence, as it unduly benefits unsecured creditors and thus prejudices its interests as a
secured creditor. In addition, TIDCORP claimed that WGC violated its covenants under its Indemnity Agreement
with TIDCORP by subsequently obtaining additional loans from RBC and other banks without TIDCORP’s
knowledge and consent.24

TIDCORP argued that the banks – including RBC – which granted new loans to WGC in violation of its Indemnity
Agreement contributed to TIDCORP’s present "iniquitous predicament" – that is, its rights as a secured creditor
were "greatly impaired"; thus, these banks "should be held accountable" pursuant to the Civil Code provision that
any "person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for
the same."25 It maintained that for these reasons, it should be given preferential and special treatment among the
WGC creditors.

TIDCORP thus prayed in its Petition thatthe portion of the assailed June 6, 2008 Order specifically directing that
all WGC obligations be settled on a pari passubasis be reversedand set aside. It likewise sought injunctive relief.

RBC filed an Urgent Motion for Intervention with attached Comment in Intervention, 26 which is anchored on its
original claim and objection to TIDCORP’s position – that the latter may notenjoy preferential treatment over the
other WGC creditors.27 Additionally, RBC argued that as an unsecured creditor which stood to be affectedby the
outcome of TIDCORP’s Petition, it should have been impleaded in the Petition; since it was not impleaded, the
Petition for review should be dismissed. Finally, RBC pointed out that TIDCORP actually knew of the additional
loans WGC obtained as it approved, on July 26, 2006, WGC’s request for TIDCORP to increase itsguarantee on
these additional loans.28 RBC therefore prayed that TIDCORP’s Petition for Review be dismissed; that the RTC’s
June 6, 2008 Order be affirmed in toto; and that TIDCORP’s application for injunctive relief be denied.

In its Opposition29 seeking the dismissal of RBC’s Urgent Motion for Intervention, TIDCORP maintained that
intervention is not allowed in rehabilitation proceedings, citing Rule 3,Section 1 of the Interim Rules of Procedure
on Corporate Rehabilitation30 (Interim Rules), which applies even on appeal, since an appeal ismerely a
continuation ofthe original action for rehabilitation. 31 It added that the cases cited by RBC do not apply to the
instant case, since they involved petitions for suspension of payments, while the instant case involves a petition
for rehabilitation pursuant to the Interim Rules. Next, it claimed that RBC failed toshow that its participation would
not delay the proceedings on appeal. Finally, it argued that a final determination of the appeal does not depend
on RBC’s participation since rehabilitation proceedings are in remand binding on all interested and affected
parties even if they did not participate in the proceedings.

On July 19, 2010, the first assailed Resolution was issued, which held thus:

As pointed out by the petitioner inits opposition, intervention is a prohibited pleading under Rule 3, Section 1 par
2 (g) of the Rules of Procedure On Corporate Rehabilitation to wit:

Section 1. Nature of proceeding-

xxxx

The proceedings shall also be summary and nonadversarial in nature. The following pleadings are prohibited:

xxxx

(g) Intervention

xxxx

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In view of the foregoing, the instant motion is DENIED. The parties are directed to file their respective
memoranda within fifteen (15) days from notice.

SO ORDERED.32

RBC filed a Motion for Reconsideration,33 arguing that the Interim Rules covering prohibited pleadings apply only
during rehabilitation proceedings and before the rehabilitation court decides the case; after a decision is
rendered, the Rules of Court34 apply. It cited the case of Leca Realty Corporation v. Manuela Corporation, 35 which
held as follows:

The issue posed before usin G.R. No. 166800 for certiorariand mandamusis whether the trial court erred in ruling
that a motion for extension of time to file record on appeal is a prohibited pleading under Section 1 of the Interim
Rules of Procedure on Corporate Rehabilitation which provides:

Section 1. Nature of Proceedings. – Any proceeding initiated under these Rules shall be considered in rem.
Jurisdiction over all those affected by the proceedings shall be considered as acquired upon publication of the
notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines in the
manner prescribed by these Rules. The proceedings shall also be summary and non-adversarial in nature. The
following pleadings are prohibited:

a. Motion to Dismiss;

b. Motion for Bill of Particulars;

c. Motion for New Trial or For Reconsideration;

d. Petition for Relief;

e. Motion for Extension;

f. Memorandum;

g. Motion for Postponement;

h. Reply or Rejoinder;

i. Third Party Complaint;

j. Intervention;

xxxx

The prohibited pleadings enumerated above are those filed in the rehabilitation proceedings. Once the trial court
decides the case and an aggrieved party appeals, the procedure to be followed is that prescribed by the Rules of
Court as mandated by Section 5, Rule 3, of the same Interim Rules, thus:

The review of any order or decision of the court or on appeal therefrom shall be in accordance with the Rules of
Court.36

In its Comment/Opposition,37 TIDCORP essentially argued that the cited pronouncement in the Leca Realtycase is
a mere obiter dictum; that since RBC failed to file a Petition for Review of the trial court’s June 6,2008 Order, it
cannot now move to intervene in TIDCORP’s Petition for Review as a substitute for its lost appeal; that there are
no valid reasonsfor intervention; and that intervention would unnecessarily delay the proceedings.

Page 302 of 343

In its second assailed Resolution of December 6, 2010, the CA remained unconvinced, stating that while the
pronouncement in Leca Realtyis applicable to the case, it is nonetheless true that RBC may not resort to
intervention as a substitute for a lost appeal, occasioned by its failure to file a Petition for Review within fifteen
(15) days from notice of the trial court’s June 6, 2008 Order – which is the sanctioned procedure under Rule
8,Section 2 of the Rules of Procedure on Corporate Rehabilitation. 38

Hence, RBC filed the instant Petition.

Issues

In the present recourse, petitioner argues that –

Respondent Justices gravely abused their discretion amounting to lack or excess of jurisdiction and failed to
perform what their duty is under the Rules of Court:

1. WHEN THEY ERRED IN DECIDING THAT THE PROPER REMEDY OF THE PETITIONER WAS TO FILE A
PETITION FOR REVIEW INSTEAD OF A MERE MOTION FOR INTERVENTION.

2. WHEN THEY SUMMARILY DENIED THE PETITIONER’S URGENT MOTION FOR INTERVENTION, DESPITE
THE CLEAR SHOWING THAT PETITIONER HAS LEGAL INTEREST IN AND WILL BE ADVERSELY AFFECTED
BY THE MATTERS RAISED BY PRIVATE RESPONDENT IN ITS PETITION AND THAT THE INTERVENTION
WILL NOT UNDULY DELAY THE PROCEEDINGS. 39

Petitioner’s Arguments

In its Petition and Reply,40 petitioner RBC maintains that the CA committed patent error and grave abuse of
discretion in failing to discern that it is not assailing the trial court’s judgment – specifically its June 6, 2008 Order
– but rather seeks its affirmance in toto, and that its sole objective was simply to obtain a dismissal of TIDCORP’s
Petition for Review; that it would have been improper for it to initiate a new case given that its rights and
liabilities as WGC creditor are so interwoven with and inseparable from TIDCORP’s; that intervention was
prompted by TIDCORP’s allegation in itsPetition for Review that the creditor banks – including RBC – are
responsible for TIDCORP’s present situation and must be held accountable to it for their willful acts; that in
claiming preferential treatment over the other creditors in the Petition for Review, TIDCORP disregards law and
settled jurisprudence to the effect that during rehabilitation proceedings, creditors should stand on equal footing;
that in view of TIDCORP’s actions, RBC stood to be affected and thus must intervene to protect its rights and
interests; that intervention is necessary to prevent multiplicity of suit and conflicting decisions that may arise from
cases that may be filed by the other creditors.

Petitioner thus prays that the assailed dispositions be reversed and that it be allowed to intervene inCA-G.R. SP
No. 104141.

Private Respondent’s Arguments

In its Comment,41 TIDCORP insists that the Rules of Procedure on Corporate Rehabilitation apply even on appeal,
as it is merely a continuation of the proceedings below; that intervention is prohibited under the said Rules; that
the CA exercised sound discretion in disallowing RBC’s motion to intervene; that intervention would have resulted
in delay; that the conditions for intervention are not present in RBC’s case, since RBC’s interest in the case is
merely inchoate and indirect; that since RBC is already a party to the rehabilitation case, intervention on its part
was improper asit may be availed of only by a third party, not an original party to the case; that RBC’s arguments
are speculative; and that the Petition lacked a valid verification and certification against forum-shopping for lack
of proof of authority that the individual who prepared the Petition was authorized to sign or file the same.

Our Ruling

The Court partially grants the Petition.

Page 303 of 343
Incipiently, on the procedural issue covering verification and the certification against forum-shopping, it must be
said that the matter has been rendered irrelevant by this Court’s November 26, 2012 Resolution42 which gave due
course to the Petition. Indeed, TIDCORP no longer reiterated the issue in its Memorandum. 43

Next, it is beyond question that under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation,
the review of any order or decision of the rehabilitation court or on appeal therefrom shall be in accordance with
the Rules of Court, unless otherwise provided. 44 This being the case, there is no visible objection to RBC’s
participation in CA-G.R. SP No. 104141 as it stands to be injured or benefited by the outcome ofTIDCORP’s
Petition for Review – being both a secured and unsecured creditor of WGC.

To recall, TIDCORP’s Petition for Review in CA-G.R. SP No. 104141 sought to 1) nullify the pari passusharing
scheme directedby the trial court; 2) declare RBC and the other creditor banks– which granted additional loans to
WGC after the latter executed its Indemnity Agreement with TIDCORP – guilty of violating TIDCORP’s rights; and
3) grant preferential and special treatment to TIDCORP over other WGC creditors. These remedies would
undoubtedly affect not merely the rights of RBC, but of all the other WGC creditors as well, as their standing or
status as creditors would be somewhat downgraded, and the manner of recovery of their respective credits will
be altered if TIDCORP’s prayer is granted. Not to mention that some of them are in danger ofbeing held liable on
TIDCORP’s accusations relative to its Indemnity Agreement with WGC. Surely, if TIDCORP’s arguments are to be
considered and its remedies granted, the other creditors should be given the opportunityto be heard by way of
comment or opposition; they are entitled to due process. "In its most basic sense, the right to due process is
simply that every man is accorded a reasonable opportunity to be heard. Its very concept contemplates freedom
from arbitrariness, as what it requires is fairness or justice. It abhors all attempts to make an accusation
synonymous with liability."45

Thus, the nature of TIDCORP’s Petition in CA-G.R. SP No. 104141 is such that the other creditors like RBC must be
allowed to participate in the proceedings. They have aninterest in the controversy where a final decree would
necessarily affect their rights. Indeed, the appellate court, on its own, should have seen that the rights of RBC
stand to be adversely affected by the remedies prayed for by TIDCORP. Thus, the CA could have ordered RBC to
file its comment in CA-G.R. SP No. 104141 and allowed to participate therein. Just as the trial court allowed RBC
and TIDCORP toparticipate in the proceedings below, the CA should have likewise allowed RBC to participate in
the proceedings before it. This is only fair and logical considering that, as admitted by TIDCORP, RBC is already a
party in the rehabilitation case, and that the instant Petition for Review is merely a continuation ofthe proceedings
below.1âwphi1

To disallow the participation of RBC constitutes an evasion of the appellate court’s positive duty to observe due
process,a gross and patent error that can be considered as grave abuse of discretion. 46 Likewise, when an adverse
effect on the substantial rights of a litigant results from the exercise of the court’s discretion, certiorarimay
issue.47 If not, this Court possesses the prerogative and initiative to take corrective action when necessary to
prevent a substantial wrong or to do substantial justice.

x x x In the exercise of our superintending control over inferiorcourts, we are to be guided by all the
circumstances of each particular case "as the ends of justice may require." So it is that the writ will be granted
where necessary to prevent a substantial wrong or to do substantial justice. 48

While TIDCORP is correct in arguing that intervention is not the proper mode for RBC coming to the CA since it is
already a party to the rehabilitation proceedings, this merely highlights the former’s error in not allowing the
latter to participate in the proceedings in CA-G.R. SP No. 104141 just as it underscores the appellate court’s
blunder in not ordering that RBC be allowed to comment or participate in the case so that they may be given the
opportunity to be heard on TIDCORP’s allegations and accusations. And while RBC chose the wrong mode for
interposing its comments and objections in CA-G.R. SP No. 104141, this does not necessarily warrant the outright
denial ofits chosen remedy; the Court is not so rigid as to be precluded from adopting measures to insure that
justice would be administered fairly to all parties concerned. If TIDCORP must pursue its Petition for Review, then
RBC should be allowed to comment and participate in the proceedings. There is no other solution to the impasse.

Page 304 of 343

Finally, the CA committed another patent error in declaring that RBC’s proper remedy was not to move for
intervention, but to file a Petition for Review of the trial court’s June 6, 2008 Order. It failed to perceive the
obvious fact that there is nothing about the trial court’s order that RBC questioned; quite the contrary, it sought
to affirm the said order in totoand simply prayed for the dismissal of TIDCORP’s Petition for Review.There is thus
no legal and logical basis for its conclusion thatRBC should have resorted toa Petition for Review just the same.

With the foregoing conclusions arrived at and the view taken of the case, the CA is hereby directed to allow RBC
tofile its comment and participate in the proceedings; thereafter, the CA shall continue with the proceedings in
CA-G.R. SP No. 104141.

WHEREFORE, the Petition is partially GRANTED. The assailed July 19, 2010 and December 6, 2010 Resolutions of
the Court of Appeals in CA-G.R. SP No. 104141 are SET ASIDE. The Court of Appeals is hereby directed to allow
petitioner Robinson’s Bank Corporation to file its comment and to participate in CA-G.R. SP No. 104141.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

FIRST DIVISION

G.R. No. 187581, October 20, 2014

PHILIPPINE BANK OF COMMUNICATIONS, Petitioner, v. BASIC POLYPRINTERS AND PACKAGING

CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This appeal is taken from the decision promulgated on December 16, 2008 in C.A.-G.R. CV No. 102484
entitled Philippine Bank of Communications, v. Basic Polyprinters and Packaging Corporation ,1 whereby the Court
of Appeals (CA) affirmed the order issued on January 11, 2008 by the Regional Trial Court (RTC), Branch 21, in
Imus, Cavite, viz:chanRoblesvirtualLawlibrary

WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Order dated January 11, 2008 of the
Regional Trial Court of Imus, Cavite, Branch 21, is hereby AFFIRMED.

SO ORDERED.2ChanRoblesVirtualawlibrary

Antecedents

Respondent Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic corporation
engaged in the business of printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and other
novelty items.3

On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging to the Limtong
Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson
Mega Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L. Realty & Development Corp.,
and Wonder Book Corporation), filed a joint petition for suspension of payments with approval of the proposed
rehabilitation in the RTC (docketed as SEC Case No. 031-04).4The RTC issued a stay order, and eventually
approved the rehabilitation plan, but the CA reversed the RTC on October 25, 2005, 5 and directed the petitioning
corporations to file their individual petitions for suspension of payments and rehabilitation in the appropriate
courts.

Page 305 of 343

Accordingly, Basic Polyprinters brought its individual petition,6 averring therein that: (a) its business since
incorporation had been very viable and financially profitable; ( b) it had obtained loans from various banks, and
had owed accounts payable to various creditors; ( c) the Asian currency crisis, devaluation of the Philippine peso,
and the current state of affairs of the Philippine economy, coupled with: ( i) high interest rates, penalties and
charges by its creditors; (ii) low demand for gift items and cards due to the economic recession and the use of
cellular phones; (iii) direct competition from stores like SM, Gaisano, Robinson and other malls; and ( iv) the fire of
July 19, 2002 that had destroyed its warehouse containing inventories worth P264,000,000.00, resulting in
difficulty of meeting its obligations; (d) its operations would be hampered and would render rehabilitation difficult
should its creditors enforce their claims through legal actions, including foreclosure proceedings; ( e) included in
its overall Rehabilitation Program was the full payment of its outstanding loans in favor of petitioner Philippine
Bank of Communications (PBCOM), RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with
moratorium of two-years for the interest and five years for the principal at 5% interest per annum and a dacion
en pago of its affiliate property in favor of EPCIBank; and ( f) its assets worth P15,374,654.00 with net liabilities
amounting to P13,031,438.00.7

Finding the petition sufficient in form and substance, the RTC issued the stay order dated August 31, 2006.8 It
appointed Manuel N. Cacho III as the rehabilitation receiver, and required all creditors and interested parties,
including the Securities and Exchange Commission (SEC), to file their comments.

After the initial hearing and evaluation of the comments and opposition of the creditors, including PBCOM, the
RTC gave due course to the petition and referred it to the rehabilitation receiver for evaluation and
recommendation.9

On October 18, 2007, the rehabilitation receiver submitted his report recommending the approval of the
rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted his clarifications and corrections
to his report and recommendations.10

Ruling of the RTC

On January 11, 2008, the RTC issued an order approving the rehabilitation plan,11 the pertinent portion of which
reads:chanRoblesvirtualLawlibrary

Petitioner’s primary business is in the printing business. Based on its updated financial report, the financial
condition has greatly improved.

However, because of the indebtedness and the slowdown in sales brought about by a depressed economy, the
present income from the operations will be insufficient to pay off its maturing obligations. Thus, the success of
the rehabilitation plan largely depends on its ability to reduce its debt obligation to a manageable level by the
suspension of payments of obligations and the proposed “dacion en pago.”

The projected cash flow attached to the report and the repayment program demonstrates the ability of the
company to settle its debt liability.

Other factors which justify the approval of the Rehabilitation Plan are as follows:
1. The petitioner has a positive net worth and inventory that can be converted into resources.

2. The Plan ensures preservation of assets, optimizes recovery of creditors’ claims and provides of an orderly
payment of debts.

3. The plan will restore petitioner to profitability and solvency and maintain it as an on-going concern to the
benefit of the stockholders, investors and creditors.

4. The rehabilitation and the continuous operation of the company will generate employment.

5. The plan is endorsed by the Rehabilitation Receiver.

Page 306 of 343

CONSIDERING THE FOREGOING, the Court hereby approves the detailed Rehabilitation Plan including the
Receiver’s Report and Recommendations and its clarifications and corrections and enjoins the petitioner to
comply strictly with the provisions of the plan, perform its obligations thereunder and take all actions necessary to
carry out the plan, failing which, the Court shall either, upon motion, motu proprio or upon the recommendation
of the Rehabilitation Receiver, terminate the proceedings pursuant to Section 27, Rule 1 of the Interim Rules of
Procedure on Corporate Rehabilitation.

The Rehabilitation Receiver is directed to strictly monitor the implementation of the Plan and submit a quarterly
report on the progress thereon.

SO ORDERED.

PBCOM appealed to the CA in due course.

Ruling of the CA

In the assailed decision promulgated on December 16, 2008, 12 the CA affirmed the questioned order of the RTC,
agreeing with the finding of the rehabilitation receiver that there were sufficient evidence, factors and actual
opportunities in the rehabilitation plan indicating that Basic Polyprinters could be successfully rehabilitated in due
time.13

Emphasizing the equitable and rehabilitative purposes of rehabilitation proceedings, the CA stated that
Presidential Decree No. 902-A, as amended, sought to “effect a feasible and viable rehabilitation by preserving a
foundering business as going concern” because it would be more valuable to preserve the assets of the
corporation14 rather than to pursue its liquidation; and observed in closing:chanRoblesvirtualLawlibrary

One last word. The purpose of rehabilitation proceedings is to enable the company to gain new lease on life and
thereby allows creditors to be paid their claims from its earnings. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the financially distressed corporation to its former
position of successful operation and solvency. This is in consonance with the State’s objective to promote a wider
and more meaningful equitable distribution of wealth to protect investments and the public. The approval of the
Rehabilitation Plan by the trial court is precisely in furtherance of the rationale behind the Interim Rules of
Corporate Rehabilitation is to effect a feasible and viable rehabilitation of ailing corporations which affect the
public welfare.15

PBCOM moved for reconsideration,16 but its motion was denied.

Issues

Hence, this appeal by PBCOM upon the following issues, namely:chanRoblesvirtualLawlibrary

THE COURT OF APPEALS GRAVELY ERRED IN DISMISSING PETITIONER’S PETITION FOR REVIEW AND AFFIRMING
THE ORDER DATED JANUARY 11, 2008, CONSIDERING THAT:chanRoblesvirtualLawlibrary

A PETITION FILED PURSUANT TO THE INTERIM RULES OF PROCEDURE ON CORPORATE REHABILITATION

PRESUPPOSES THAT THE PETITIONING CORPORATION HAS SUFFICIENT PROPERTY TO COVER ALL ITS
INDEBTEDNESS. RESPONDENT IS INSOLVENT AS ITS ASSETS ARE LESS THAN ITS OBLIGATIONS;cralawlawlibrary

THE “DETAILED REHABILITATION PLAN” DOES NOT PROVIDE MATERIAL FINANCIAL COMMITMENTS FROM
RESPONDENT ITSELF OR WOULD-BE INVESTORS
Page 307 of 343
C

THE TERMS AND CONDITIONS OF THE “APPROVED REHABILITATION PLAN” ARE TOO ONEROUS
PARTICULARLY THE REHABILITATION TERM OF FIFTEEN (15) YEARS AS WELL AS THE “WAIVER” OF ALL INTEREST
AND PENALTIES BEGINNING FEBRUARY 2004 UP TO THE TIME OF ITS APPROVAL. 17

The petitioner claims that the CA did not pass upon the issues presented in its petition, particularly Basic
Polyprinters’ liquidity that was material in proceedings for corporate rehabilitation; that a petition for
rehabilitation presupposed that the petitioning corporation had sufficient property to cover all its indebtedness,
but Basic Polyprinters did not show so because its assets were much less than its outstanding obligations; that
Basic Polyprinters had under-declared its outstanding loans, i.e., its total loan obligations with the petitioner was
at P118,411,702.70 as of June 30, 2006, and not just P71,315,086.00 as it claimed; that the independent appraisal by
the Professional Asset Valuers, Inc. (PAVI) on Basic Polyprinters’ machineries and printing equipment mortgaged
to it (PBCOM) had a fair market value of only P6,531,000.00, and a prompt sale value of only P4,572,000.00, as
compared to the fair market value of P15,110,000.00 declared by Basic Polyprinters; that the rehabilitation plan did
not contain the material financial commitments required by Section 5, Rule 4 of the Interim Rules of Procedure
for Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed repayment scheme did not constitute
a material financial commitment, and the proposed dacion en pago was not proper because the property subject
thereof had been mortgaged in its favor; and that the absence of capital infusion rendered impossible the
proposal to invest in new machineries that would increase sales and improve quality and capacity. 18

The petitioner posits that the assailed decision of the CA effectively gave Basic Polyprinters a moratorium for
seven years on both interest and principal payments counted from the issuance of the stay order in 2004 that
effectively prejudiced its creditors.19

Basic Polyprinters refutes the petitioner, saying that the petitioner raises factual issues improper under Rule 45 of
the Rules of Court; that as long as the rehabilitation court found that the petitioning corporation could still be
rehabilitated, its findings of fact should be binding when they were supported by substantial evidence; that the
independent appraisal report by PAVI was unauthorized by the RTC; and that the validity of the rehabilitation
plan could be upheld for its complete satisfaction of the requirements of Section 5, Rule 4 of the Interim Rules.

In fine, we shall determine whether the approval of the rehabilitation plan was proper despite: ( a) the alleged
insolvency of Basic Polyprinters; and (b) absence of a material financial commitment pursuant to Section 5, Rule 4
of the Interim Rules.

Ruling

We reverse the judgment of the CA.

I
Liquidity was not an issue
in a petition for rehabilitation

The petitioner contends that the sole issue in corporate rehabilitation is one of liquidity; hence, the petitioning
corporation should have sufficient assets to cover all its indebtedness because it only foresees the impossibility of
paying the indebtedness falling due. It claims that rehabilitation became inappropriate because Basic Polyprinters
was insolvent due to its assets being inadequate to cover the outstanding obligations. 20

We disagree with the contention of the petitioner.

Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a position of successful operation
and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover
by way of the present value of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated.”21 It contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful operation and solvency. 22

Page 308 of 343

In Asiatrust Development Bank v. First Aikka Development, Inc.,23 we said that rehabilitation proceedings have a
two-pronged purpose, namely: (a) to efficiently and equitably distribute the assets of the insolvent debtor to its
creditors; and (b) to provide the debtor with a fresh start, viz:chanRoblesvirtualLawlibrary

Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes. On the one hand, they
attempt to provide for the efficient and equitable distribution of an insolvent debtor's remaining assets to its
creditors; and on the other, to provide debtors with a "fresh start" by relieving them of the weight of their
outstanding debts and permitting them to reorganize their affairs. The purpose of rehabilitation proceedings is to
enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its
earnings.24

Consequently, the basic issues in rehabilitation proceedings concern the viability and desirability of continuing the
business operations of the petitioning corporation. The determination of such issues was to be carried out by the
court-appointed rehabilitation receiver,25cralawred who was Cacho in this case.

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA) of 2010 ), a law that is
applicable hereto,26 has defined a corporate debtor as a corporation duly organized and existing under Philippine
laws that has become insolvent.27 The term insolvent is defined in Republic Act No. 10142 as “the financial
condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets .”28 As such, the contention that rehabilitation
becomes inappropriate because of the perceived insolvency of Basic Polyprinters was incorrect.

II
A material financial commitment is
significant in a rehabilitation plan

The petitioner next argues that Basic Polyprinters did not present any material financial commitment in the
rehabilitation plan, thereby violating Section 5, Rule 4 of the Interim Rules, the rule applicable at the time of the
filing of the petition for rehabilitation. In that regard, Basic Polyprinters made no commitment in relation to the
infusion of fresh capital by its stakeholders, 29 and presented only a “lopsided” protracted repayment schedule
that included the dacion en pago involving an asset mortgaged to the petitioner itself in favor of another
creditor.

A material financial commitment becomes significant in gauging the resolve, determination, earnestness and
good faith of the distressed corporation in financing the proposed rehabilitation plan. 30 This commitment may
include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued
successful operation of the debtor corporation during the period of rehabilitation. 31

Basic Polyprinters presented financial commitments, as follows:chanRoblesvirtualLawlibrary

(a) Additional P10 million working capital to be sourced from the insurance claim;cralawlawlibrary

(b) Conversion of the directors’ and shareholders’ deposit for future subscription to common stock; 32

(c) Conversion of substituted liabilities, if any, to additional paid-in capital to increase the company’s equity; and

(d) All liabilities (cash advances made by the stockholders) of the company from the officers and stockholders
shall be treated as trade payables.33

However, these financial commitments were insufficient for the purpose. We explain.

The commitment to add P10,000,000.00 working capital appeared to be doubtful considering that the insurance
claim from which said working capital would be sourced had already been written-off by Basic Polyprinters’s
affiliate, Wonder Book Corporation.34 A claim that has been written-off is considered a bad debt or a worthless
asset,35 and cannot be deemed a material financial commitment for purposes of rehabilitation. At any rate, the
Page 309 of 343
proposed additional P10,000,000.00 working capital was insufficient to cover at least half of the shareholders’
deficit that amounted to P23,316,044.00 as of June 30, 2006.

We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder Book) 36that the
conversion of all deposits for future subscriptions to common stock and the treatment of all payables to officers
and stockholders as trade payables was hardly constituting material financial commitments. Such “conversion” of
cash advances to trade payables was, in fact, a mere re-classification of the liability entry and had no effect on the
shareholders’ deficit. On the other hand, we cannot determine the effect of the “conversion” of the directors’ and
shareholders’ deposits for future subscription to common stock and substituted liabilities on the shareholders’
deficit because their amounts were not reflected in the financial statements contained in the rollo.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to address the low
demands for their products and the effect of direct competition from stores like SM, Gaisano, Robinsons, and
other malls. Even the P245 million insurance claim that was supposed to cover the destroyed inventories worth
P264 million appears to have been written-off with no probability of being realized later on.

We observe, too, that Basic Polyprinters’s proposal to enter into the dacion en pago to create a source of “fresh
capital” was not feasible because the object thereof would not be its own property but one belonging to its
affiliate, TOL Realty and Development Corporation, a corporation also undergoing rehabilitation. Moreover, the
negotiations (for the return of books and magazines from Basic Polyprinters’s trade creditors) did not partake of a
voluntary undertaking because no actual financial commitments had been made thereon.

Worthy of note here is that Wonder Book Corporation was a sister company of Basic Polyprinters, being one of
the corporations that had filed the joint petition for suspension of payments and rehabilitation in SEC Case No.
031-04 adverted to earlier. Both of them submitted identical commitments in their respective rehabilitation plans.
As a result, as the Court observed in Wonder Book,37 the commitments by Basic Polyprinters could not be
considered as firm assurances that could convince creditors, future investors and the general public of its financial
and operational viability.

Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation proceedings,38 Basic
Polyprinters was expected to exert a conscious effort in formulating the same, for such plan would spell the future
not only for itself but also for its creditors and the public in general. The contents and execution of the
rehabilitation plan could not be taken lightly.

We are not oblivious to the plight of corporate debtors like Basic Polyprinters that have inevitably fallen prey to
economic recession and unfortunate incidents in the course of their operations. However, we must endeavor to
balance the interests of all the parties that had a stake in the success of rehabilitating the debtors. In doing so
here, we cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in good faith, for it was,
in fact, unilateral and detrimental to its creditors and the public.

ACCORDINGLY, the Court GRANTS the petition for review on certiorari; SETS ASIDE and REVERSESthe decision
promulgated on December 16, 2008 and the resolution promulgated on April 22, 2009, both by the Court of
Appeals, as well as the order issued on January 11, 2008 by the Regional Trial Court approving the rehabilitation
plan submitted by Basic Polyprinters and Packaging Corporation; DISMISSES the petition for suspension of
payments and rehabilitation of Basic Polyprinters and Packaging Corporation; and DIRECTS Basic Polyprinters
and Packaging Corporation to pay the costs of suit.

SO ORDERED.chanroblesvirtuallawlibrary

Sereno, C.J., Leonardo-De Castro, Perez, and Perlas-Bernabe, JJ., concur.

G.R. No. 185590 December 3, 2014

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.

Page 310 of 343

LEY CONSTRUCTION AND DEVELOPMENT CORPORATION and SPOUSES MANUEL LEY and JANET
LEY,Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court seeks the reversal of the Court of
Appeals' Decision1 dated September 4, 2008 in CA-G.R. CV No. 75590 dismissing the appeal of petitioner
Metropolitan Bank and Trust Company assailing the dismissal of its complaint by the Regional Trial Court (RTC) of
Makati City, Branch 56, and the Resolution 2 dated December 5, 2008 denying the Bank's motion for
reconsideration.

The Court of Appeals adopted the following recital of facts in the Decision 3 dated July 3, 2001 of the RTC in Civil
Case No. 91-1878:

This is an action for recovery of a sum of money and damages with a prayer for the issuance of writ of
preliminary attachment filed by the plaintiff Philippine Banking Corporation 4 against the defendants, namely: Ley
Construction and Development Corporation (hereafter "LCDC") and Spouses Manuel and Janet C. Ley (hereafter
"[defendant]-spouses").

The complaint alleges that: Defendant LCDC, a general contracting firm, through the oral representations of
defendant-spouses, applied with plaintiff, a commercial bank, for the opening of a Letter of Credit. Plaintiff issued,
on April 26, 1990, Letter of Credit DC 90[-]303-C in favor of the supplier-beneficiary Global Enterprises Limited, in
the amount of Eight Hundred Two Thousand Five Hundred U.S. Dollars (USD 802,500.00). The letter of credit
covered the importation by defendant LCDC of Fifteen Thousand (15,000) metric tons of Iraqi cement from Iraq.
Defendant applied for and filed with plaintiff two (2) Applications for Amendment of Letter of Credit on May 3,
1990 and May 11, 1990, respectively.

Thereafter, the supplier-beneficiary Global Enterprises, Inc. negotiated its Letter of Credit with the negotiating
bank Credit Suisse of Zurich, Switzerland. Credit Suisse then sent a reimbursement claim by telex to American
Express Bank Ltd., New York on July 25, 1990 for the amount of Seven Hundred Sixty[-]Six Thousand Seven
Hundred Eight U.S. Dollars (USD 766,708.00) with a certification that all terms and conditions of the credit were
complied with. Accordingly, on July 30, 1990, American Express Bank debited plaintiff’s account Seven Hundred
Seventy Thousand Six Hundred Ninety[-]One U.S. Dollars and Thirty Cents (USD 770,691.30) and credited Credit
Suisse Zurich Account with American Express Bank, Ltd., New Yorkfor the negotiation of Letter of Credit. On
August 6, 1990, plaintiff received from Credit Suisse the necessary shipping documents pertaining to Letter of
Credit DC 90-303-C that were in turn delivered to the defendant. Upon receipt of the aforesaid documents,
defendants executed a trust receipt. However, the cement that was to be imported through the opening of the
subject Letter of Credit never arrived in the Philippines.

The prompt payment of the obligation of the defendant LCDC was guaranteed by [defendant]-spouses under the
Continuing Surety Agreement executed by the latter in favor of the defendant. The obligation covered by the
subject Letter of Credit in the amount of USD 802,500.00 has long been overdue and unpaid, notwithstanding
repeated demands for payment thereof. Plaintiff, therefore, instituted the instant complaint for recovery of the
following amounts: Twenty[-]Three [M]illion Two Hundred [F]ifty[-]Nine Thousand One Hundred Twenty[-]Four
Pesos and Fourteen Centavos (PH₱23,259,124.14) as of June 15, 1991, inclusive of interestand penalty, plus
additional interest thereon of Thirty percent (30%) per annum; attorney’s fees equivalent to Twenty[-]Five percent
[25%] of the total obligation; and costs of suit.

In support of its cause of action against defendant, plaintiff presented the testimony of Mr. Fenelito Cabrera,
Head of the Foreign Department of plaintiff’s Head Office. (T.S.N. dated June 16, 1995, p. 4) There being no other
witness to be presented by the plaintiff (Order dated June 27, 1997), the plaintiff filed its formal offer of exhibits
dated July 18, 1997 to which defendant filed its comments/objections to formal offer of evidence dated February
23, 1998. In an order dated March 4, 1998, Exhibits "A" to "N" to "N-4" including [their] sub-markings were
Page 311 of 343
admitted for the purposes they were respectively offered. However, on defendants’ motion for reconsideration
dated [March 30,] 1998 that was duly opposed by the plaintiff in itsopposition dated June 3, 1998, this Court
partially granted defendants’ motion for reconsideration. Consequently, Exhibits "D", "E", "H","I", "J", "K", "L", and
"M" and their sub-markings were not admitted for not being properly identified and authenticated by a
competent witness. Only Exhibits "A", "B", "C", "C-1", and "N", "N-1" to "N-4" remain admitted in evidence. (Order
dated September 9, 1998) Defendant filed a motion to dismiss by way of demurrer to evidence on the ground
that plaintiff’s witness Mr. Fenelito Cabrera was incompetent to testify with respect tothe transaction between the
plaintiff and the defendant and that the plaintiff’s documentary exhibits were not properly identified and
authenticated.5

The trial court found that the Bank’s only witness, Fenelito Cabrera, was incompetent to testify on the documents
presented by the Bank during the trial. Cabrera was with the Bank’s Dasmariñas Branch and not with the Head
Office from March 1990 to June 1991, the period the transaction covered by the documents took place. Thus, he
could not have properly identified and authenticated the Bank’s documentary exhibits. His lack of competence
was even admitted by the Bank’s counsel who did not even ask Cabrera to identify the documents. Asthe
documents were not identified and duly authenticated, the Bank’s evidence was not preponderant enough to
establish its right to recover from LCDC and the spouses Ley. 6

The trial court further ruled that only the following documents remained admitted in evidence:

Exhibit Document

"A" Continuing Surety Agreement dated July 25, 1989

"B" Application and Agreement for Commercial Letter of Credit

"C" and "C-1" Letter of Credit No. DC 90-303-C

"N" and "N-1" to "N-4" Statement of Outstanding Obligations

For the trial court, these were insufficient to show that LCDC and the spouses Ley were responsible for the
improper negotiation of the letter of credit. Thus, the trial court concluded in its Decision dated July 3, 2001 that
the Bank failed to establish its cause ofaction and to make a sufficient or preponderant case. 7 The dispositive
portion of the decision reads:

WHEREFORE, the demurrer to evidence is granted. The case is dismissed. 8 The Bank appealed to the Court of
Appeals. It claimed that the trial court erred in granting the demurrer toevidence of LCDC and the spouses Ley on
the ground that the Bank failed to establish its cause of action. The Bank insisted that, even without considering
the exhibits excluded in evidence by the trial court, the Bank was able to prove by preponderant evidence that it
had a right and that right was violated by LCDC and the spouses Ley. It explained that the trial court was wrong in
considering only Exhibits "A," "B," "C," "C-1," "N" and "N-1" to "N-4" as the following documents were also
admitted in evidence and should have been considered in the resolution of the demurrer to evidence. 9

Exhibit Document

"F" Register Copy or Memorandum on the Letter of Credit

"G" Trust Receipt No. TRI432/90 dated August 16, 1990

"G-1" Bank Draft

"G-2" Bill of Exchange

The Bank asserted that the consideration of Exhibits "F," "G" and "G-1" to "G-2" would have established the
following:

Page 312 of 343

 (a) On August 16, 1990, LCDC and the spouses Ley received from the Bank the necessary shipping
documents relative to the Letter of Credit evidencing title to the goods subject matter of the importation
which the Bank had previously received from Credit Suisse;

(b) Upon receipt of the shipping documents, LCDC and the spouses Ley executed a trust receipt, Trust
Receipt No. TRI432/90, in favor of the Bank covering the importation of cement under Letter of Credit
No. DC 90-303-C;

(c) The issuance of the trust receipt was an acknowledgement by LCDC and the spouses Ley of their
receipt of the shipping documents and of their liability to the Bank;

(d) By signing the trust receipt, constituted an admission by LCDC and the spouses Ley that the Letter of
Credit was in order, including the Bank’s payment of the amountof US$766,708.00 under the Letter of
Credit.10

Thus, even with only the testimony ofCabrera and Exhibits "A," "B," "C," "C-1," "N" and "N-1" to "N-4" and "F," "G"
and "G-1" to "G-2," the demurrer should have been denied and LCDC and the spouses Ley held liable to the Bank.

Moreover, the Bank contended that its Exhibits "D," "E," "H," and "I" should have been also admitted in evidence
because LCDC and the spouses Ley effectively admitted the authenticity of the said documents when they stated
in the pre-trial brief which they submitted during the pretrial of the case atthe trial court:

III. DOCUMENTARY EXHIBITS

Defendants shall adopt the documents submitted by plaintiff and marked as Annexes "A", "B", "C", "D","E", "E-1",
"F", "G", "G-1", "H" and "H-1" in the plaintiff’s complaint.

Defendants reserve the right tomark or adopt such other documentary evidence as may be discovered or
warranted to support its claim in the course of the trial. x x x. 11

The Court of Appeals found no merit in the Bank’s appeal. It observed that Cabrera, the Bank’s onlywitness,
prepared and properly identified Exhibits "F," "G," "N" and "N-1" to "N-4" only. The Bank’s counsel even admitted
in open court during Cabrera’s direct examination that Cabrera was incompetent to testify onthe rest of the
Exhibits. The trial court was therefore correct in not giving any evidentiary weight to those Exhibits not properly
identified by Cabrera.12

For the Court of Appeals, the statement in the pre-trial brief that LCDC and the spouses Ley "shall adopt"
Annexes "A," "B," "C," "D," "E," "E-1," "F," "G," "G-1," "H" and "H-1" of the Bank’s complaint did not constitute an
admission of the said documents by LCDC and the spouses Ley. However, the appellate court noted that LCDC
and the spouses Ley admitted the existence and authenticity of the Bank’s Exhibits "A," "B," "C," "C-1," and "G."13

Nevertheless, the Court of Appeals ruled that the following Exhibits of the Bank were admitted in evidence:

Exhibit Document

"A" Continuing Surety Agreement dated July 25, 1989

"B" Application and Agreement for Commercial Letter of Credit

"C" and "C-1" Letter of Credit No. DC 90-303-C

"F" Register Copy or Memorandum on the Letter of Credit

"G" Trust Receipt No. TRI432/90 dated August 16, 1990

"N" and "N-1" to "N-4" Statement of Outstanding Obligations

Page 313 of 343

Even upon inclusion and consideration of the above-mentioned exhibits, the Court of Appeals held that the Bank
still failed to show that LCDC and the spouses Ley were directly responsible for the improper negotiation of the
letter of credit. Thus, the Court of Appeals, in its Decision dated September 4, 2008, dismissed the appeal and
affirmed the decision of the trial court. 14 The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and the assailed decision of the RTC,
National Capital Judicial Region, Branch 56, Makati City in Civil Case No. 91-1878 is AFFIRMED.15

The Court of Appeals denied the Bank’s motion for reconsideration, prompting the Bank to file this petition.

The Bank insists that it has been ableto establish its cause of action not only through preponderance of evidence
but even by the admissions of LCDC and the spouses Ley. It maintains that its cause of action is not predicated on
the improper negotiation of the letter of credit but on the breach of the terms and conditions of the trust
receipt.16

The petition fails.

First, the Bank’s petition suffers from a fatal infirmity. In particular, it contravenes the elementary rule of appellate
procedure that an appeal to this Court by petition for review on certiorari under Rule 45 of the Rules of Court
"shall raise only questions of law."17 The rule is based on the nature of this Court’s appellate function – this Court
is not a trier of facts18 – and on the evidentiary weight given to the findings of fact of the trial court which have
been affirmed on appeal by the Court of Appeals – they are conclusive on this Court. 19 While there are
recognized exceptions to the rule,20 this Court sees no reason to apply the exception and not the rule in this case.

The conceptual distinction between a question of law and a question of fact is well-settled in case law:

There is a "question of law" when the doubt or difference arises as to what the law is on a certain state of facts,
and which does not call for an examination of the probative value of the evidence presented by the parties-
litigants. On the other hand, there is a "question of fact" when the doubt or controversy arises as to the truth or
falsity of the alleged facts. x x x.21

The issue of whether or not the Bank was able to establish its cause of action by preponderant evidence is
essentially a question of fact. Stated in another way, the issue which the Bank raises in this petition is whether the
evidence it presented during the trial was preponderant enough to hold LCDC and the spouses Ley liable.

The required burden of proof, or that amount of evidence necessary and sufficient to establish one’s claim or
defense, in civil cases is preponderance of evidence. 22 Preponderance of evidence is defined as follows:

Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side and is usually
considered to be synonymous with the term "greater weight of evidence" or "greater weight of the credible
evidence." Preponderance of evidence is a phrase which, in the last analysis, means probability to truth. It is
evidence which is more convincing to the court as worthier of belief than that which is offered in opposition
thereto.23(Emphasis supplied, citation omitted.)

As preponderance of evidence refers to the probability to truth of the matters intended to be proven as facts, it
concerns a determination of the truth or falsity of the alleged facts based on the evidence presented. Thus, a
review of the respective findings of the trial and the appellate courts as to the preponderance of a party’s
evidence requires that the reviewing court address a question of fact.

Moreover, a demurrer to evidence is a motion to dismiss on the ground of insufficiency of evidence. Evidence is
the means, sanctioned by the Rules of Court, of ascertaining in a judicial proceeding the truth respecting a matter
of fact.24 As such, the question of sufficiency or insufficiency of evidence, the basic issue presented by the Bank,
pertains to the question of whether the factual matters alleged by the Bank are true. Plainly, it is a question of fact
and, as such, not proper subject of a petition for review on certiorari under Rule 45 of the Rules of Court. It was

Page 314 of 343

incumbent upon the Bank to demonstrate that this case fell under any of the exceptions to this rule but it failed
to do so.

Second, the Bank attempts to avoid the "only questions of law" rule for appeals filed under Rule 45 by invoking
the misapprehension of facts exception.25 According to the Bank, the trial and the appellate courts
misapprehended the facts with respect tothe determination of the basis of the Bank’s cause of action.26 In
particular, the Bank contends that both the trial and the appellate courts erred in the consideration of the proper
actionable document upon which the Bank based its cause of action. The Bank asserts that its cause of action
isnot grounded on the Letter of Credit but on the Trust Receipt.

The Bank’s reference to the Trust Receipt as its "primary actionable document" 27 is mistaken and misleading.

The nature of the cause of action isdetermined by the facts alleged in the complaint. 28 A party’s cause of action is
not what the party says it is, nor is it what the designation of the complaint states, but what the allegations in the
body define and describe.29

In this case, the Bank’s allegations asto the basis of its cause of action against LCDC and the spouses Ley,
however, belie the Bank’s claim. In particular, the relevant portion of the Bank’s Complaint 30 reads:

1.2 The defendants:

a. Ley Construction and Development Corporation (LCDC) is a general contracting firm engaged
in the construction of buildings, infrastructures, and other civil works with principal office at
Mapulang Lupa St., Malinta, Valenzuela, Metro Manila where it [may be] served with summons
and other processes of this Court.

b. Sps. Manuel and Janet C. Ley, the major stockholders of defendant (LCDC)with business
address at 23rd Floor Pacific Star Bldg., Makati Avenue, Makati, Metro Manila where the
processes of this Honorable Court [may be] served upon them are impleaded herein in their
capacity as Surety for the obligation incurred by defendant LCDC with the herein plaintiff by
virtue of a Continuing Surety Agreement they executed in favor of the plaintiff, a copy of which
is hereto attached as Annex "A";

2. STATEMENT OF CAUSE OF ACTION AGAINST DEFENDANT LCDC AND SPOUSES MANUEL AND JANET LEY

2.1 In conjunction with its business, defendant LCDC sought to import "Iraqi Cement" from Iraq
thru its supplier "Global Enterprises, Limited" with address at 15 A. Tuckeys Lane, Gibraltar.

2.2 To finance this importation, defendant LCDC applied with the plaintiff for the opening of
Letter of Credit as evidenced by the Application and Agreement for Commercial Letter of Credit,
copy of which is marked as Annex "B" and made integral part hereof.

2.3 Acting on defendant[’]s oral representation and those stated in its application (Annex "B"),
plaintiff issued on April 26, 1990 its Letter of Credit No. DC 90[-]303-C in favor of the supplier
Global Enterprises Limited, as beneficiary in the amount of U.S. Dollars: EIGHT HUNDRED TWO
THOUSAND FIVE HUNDRED (US $802,500) for the account of defendant, covering the
importation of 15,000 metric tons of Iraqi Cement from Iraq, copy of the Letter of Credit is
marked as Annex "C" and made integral part hereof;

2.4 On May 3, 1990, defendant applied for and filed with plaintiff an Application for Amendment
of Letter of Credit, copy of which is attached as Annex "D" hereof, and another application for
amendment was filed on May 11, 1990 copy of which is marked as Annexes "E" and "E-1" hereof;

2.5 After these amendments were communicated to the negotiating bank, Credit Suisse of
Zurich, Switzerland, the beneficiary negotiated its Letter of Credit therewith. Thereafter, Credit
Page 315 of 343
Suisse sent a reimbursement claim by telex to American Express Bank Ltd., New York on July 25,
1990 for the amount of US$766,708.00 with a Certification that all terms and conditions of the
credit were complied with;

2.6 Accordingly, on July 30, 1990, American Express Bank debited plaintiff’s account
US$770,691.30 and credited Credit Suisse Zurich Account with American Express Bank Ltd., New
York for the negotiation of Letter of Credit;

2.7 On August 6, 1990, plaintiff received from Credit Suisse the necessary shipping documents
pertaining to Letter of Credit DC 90-303-C all of which were in turn delivered and received by
the defendant on August 16, 1990 as evidenced by their acknowledgment appearing on the
plaintiff’s register copy, a copy of which is hereto attached as Annex "F";

2.8 Upon defendant’s receipt of the shipping documents and other documents of title to the
imported goods, defendant signed a trust receipt manifesting its acceptance/conformity that the
negotiation of the LC is in order. A copy of the TR and the draft issued by the defendant as a
means of paying its LC obligation to the plaintiff are hereto attached and marked as Annexes "G"
and "G-1" hereof;

2.9 Sometime during the 3rd week of August, defendant LCDC informed the plaintiff that the
expected shipment of cement subject matter of the LC was allegedly held up in Iraq purportedly
on account of the trade embargo imposed against it by the United Nation[s] and sought
assistance from the plaintiff to secure no-dollar import permit from the Central Bank as
defendant was negotiating with its supplier Global Enterprises Limited, Inc. for an alternate
shipment of Syrian Cement.

2.10 Plaintiff acceded to the request of the defendant and conformably secured the requested
approval from Central Bank to allow the defendant to import cement on a no-dollar basis, a
copy of the defendant’s request as well as the Central Bank approval are hereto attached as
Annexes "H" and "H-1".

2.11 About two months after the plaintiff has obtained the requested Central Bank approval
(Annex "H-1")[,] plaintiff was again advised by the defendant that the alternate shipment of
Syrian Cement is no longer forthcoming and that defendant LCDC after a series of negotiation
with its supplier has agreed with the latter for a reimbursement of the value of the negotiated
Letter of Credit.

2.12 While defendant was negotiating with its supplier for that replacement of Syrian cement,
defendant advised plaintiff not to initiate any move as it might jeopardize defendant’s
negotiation with its supplier.

2.13 In December 1990, four (4) months from defendant’s receipt of the shipping and export
documents from plaintiff, as it became perceptible that defendant’s negotiation with its supplier
for reimbursement or replacement would fail[,] defendant for the first time asked for copies of
the beneficiary’s draft, the Charter Party Agreement even as it contested the validity of
defendant’s obligation to plaintiff.

2.14 For the first time, defendant also began to assail the validity of the payment made by the
plaintiff to the supplier (Global Enterprises Ltd.) through Credit Suisse, with the intention of
avoiding the payment of its lawful obligation to reimburse the plaintiff the amount of US
$802,500 which obligation is now long overdue and unpaid notwithstanding repeated demands.

2.15 The obligation covered by the aforesaid Letter of Credit bears interest and charges at the
rateof 30% per annum which rate [may be] increased or decreased within the limits allowed by
the law.
Page 316 of 343
 2.16 The prompt payment of the obligations contracted by defendant LCDC from the plaintiff
inclusive of the subject Letter of Creditis guaranteed by defendant Sps.Manuel and Janet Ley by
making themselves jointly and severally liable with the defendant LCDC in accordance with the
terms of a Continuing Surety Agreement which they executed in favor of the plaintiff (Annex
"A").31 (Emphases supplied.)

That the Bank’s cause of action was hinged on the Letter of Credit is unmistakable. Taken as a whole, the Bank’s
allegations make a cause of action based on the Letter of Credit. The Trust Receipt was mentioned incidentally
and appears only in paragraph 2.8 of the Complaint. 32 In stark contrast, the Letter of Credit figures prominently in
the Complaint as it is mentioned in almost all of the paragraphs of Part 2 (Statement of Cause of Action Against
Defendant LCDC and Spouses Manuel and Janet Ley). More tellingly, in paragraph 2.15, the Bank speaks of "the
obligation covered by the aforesaid Letter of Credit." 33

Moreover, under paragraphs1.2(b) and 2.16 of the Complaint, the spouses Ley have been impleaded as co-
defendants of LCDC on account of their execution of a Continuing Surety Agreement in the Bank’s favor to
guarantee the "prompt payment of the obligations contracted by defendant LCDC from the plaintiff inclusive of
the subject Letter of Credit."34 In short, the Bank seeks to hold liable (1) LCDC for its obligations under the Letter
of Credit, and (2) the spouses Ley for their obligations under the Continuing Surety Agreement which stands as
security for the Letter of Credit and not for the Trust Receipt.

Another significant factor that contradicts the Bank’s assertion that its "primary actionable document" is the Trust
Receipt is the manner it pleaded the Letter of Credit and the Trust Receipt, respectively.

The relevant rule on actionable documents is Section 7, Rule 8 of the Rules of Court which provides:

Section 7. Action or defense based on document. – Whenever an action or defense is based upon a written
instrument or document, the substance of such instrument or document shall be set forth in the pleading, and
the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part
of the pleading, or said copy may with like effect be set forth in the pleading.

An "actionable document" is a written instrument or document on which an action or defense is founded. It may
be pleaded in either of two ways:

(1) by setting forth the substance ofsuch document in the pleading and attaching the document thereto
as an annex, or

(2) by setting forth said document verbatim in the pleading. 35

A look at the allegations in the Complaint quoted abovewill show that the Bank did not set forth the contents of
the Trust Receipt verbatim in the pleading. The Bank did not also set forth the substance of the Trust Receipt in
the Complaint but simply attached a copy thereof as an annex. Rather than setting forth the substance of the
Trust Receipt, paragraph 2.8 of the Complaint shows that the Bank simply described the Trust Receipt as LCDC’s
manifestation of "its acceptance/conformity that the negotiation of the [Letter of Credit] is in order."36

In contrast, while the Bank did not set forth the contents of the Letter of Credit verbatim in the Complaint, the
Bank set forth the substance of the Letter of Credit in paragraph 2.3 of the Complaint and attached a copy
thereof as Annex "C" of the Complaint.1awp++i1 The Bank stated that it "issued on April 26, 1990 its Letter of
Credit No. DC 90[-]303-C in favor of the supplier Global Enterprises Limited, as beneficiary[,] in the amount of
U.S. Dollars: EIGHT HUNDRED TWO THOUSAND FIVE HUNDRED (US$802,500.00) for the account of defendant
[LCDC], covering the importation of 15,000 metric tonsof Iraqi Cement from Iraq." 37

Thus, the Bank’s attempt to cling to the Trust Receipt as its so-called "primary actionable document" is negated
by the manner of its allegations in the Complaint. Thus, too, the trial and the appellate courts did not
misapprehend the facts when they considered the Letter of Credit as the basis of the Bank’s cause of action.

Page 317 of 343

Third, a look at the Letter of Credit, the actionable document on which the Bank relied in its case against LCDC
and the spouses Ley, confirms the identical findings of the Regional Trial Court and the Court of Appeals.

In Keng Hua Paper Products Co., Inc. v. Court of Appeals, we held 38:

In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer
and the seller, (2) the contract of the buyer with the issuing bank, and (3) the letter of credit proper in which the
bank promises to pay the seller pursuant to the terms and conditions stated therein. x x x.

Here, what is involved is the second contract – the contract of LCDC, as the buyer of Iraqi cement, with the Bank,
as the issuer of the Letter of Credit. The Bank refers to that contract in the Petition for Review on Certiorari and
the Memorandum filed by the Bank in this case when the Bank argues that, as LCDC and the spouses Ley have
admitted the issuance of the Letter of Credit in their favor, they are "deemed to have likewise admitted the terms
and conditions thereof, as evidenced by the stipulation therein appearing above the signature of respondent
Janet Ley,"39 viz:

"In consideration of your arranging, at my/o[u]r request[,] for the establishment of this commercial letter of credit
(thereinafter referred to as the ["]Credit["]) substantially in accordance with the foregoing, I/we hereby covenant
and agree to eachand all of [the] provisions and conditions stipulated on the reverse side hereof." 40

The above stipulation actually appears on the Application and Agreement for Commercial Letter of Credit, the
Bank’s Exhibit "B." It is the contract which contains the provisions and conditions governing the legal relationship
of the Bank and LCDC, particularly their respective rights and obligations, in connection with the Bank’s issuance
of Letter of Credit No. DC 90-303-C. The importance of the provisions and conditions supposed to be stipulated
on the reverse side of the Application and Agreement for Commercial Letter of Credit is underscored by the
following note appearing below the space for the signature of Janet Ley:

IMPORTANT: PLEASE READ PROVISIONS AND CONDITIONS ON REVERSE SIDE HEREOF BEFORE SIGNING
ABOVE.41

However, the Bank’s Exhibit "B" has nothing on its reverse side. In other words, the reverse side of the Application
and Agreement for Commercial Letter of Credit is a blank page. 42 Even the copy of the Application and
Agreement for Commercial Letter of Credit attached to the Bank’s Complaint also has nothing on its back page. 43

A cause of action – the act or omission by which a party violates the right of another 44 – has three essential
elements:

(1) the existence of a legal right in favor of the plaintiff;

(2) a correlative legal duty of the defendant to respect such right; and

(3) an act or omission by such defendant in violation of the right of the plaintiff with a resulting injury or
damage to the plaintiff for which the latter may maintain an action for the recovery of relief from the
defendant.45

Although the first two elements may exist, a cause of action arises only upon the occurrence of the last element,
giving the plaintiff the right to maintain an action in court for recovery of damages or other appropriate
relief.46 In this case, however, even the legal rights of the Bank and the correlative legal duty of LCDC have not
been sufficiently established by the Bank in view of the failure of the Bank's evidence to show the provisions and
conditions that govern its legal relationship with LCDC, particularly the absence of the provisions and conditions
supposedly printed at the back of the Application and Agreement for Commercial Letter of Credit. Even assuming
arguendo that there was no impropriety in the negotiation of the Letter of Credit and the Bank's cause of action
was simply for the collection of what it paid under said Letter of Credit, the Bank did not discharge its burden to
prove every element of its cause of action against LCDC.

Page 318 of 343

This failure of the Bank to present preponderant evidence that will establish the liability of LCDC under the Letter
of Credit necessarily benefits the spouses Ley whose liability is supposed to be based on a Continuing Surety
Agreement guaranteeing the liability of LCDC under the Letter of Credit.

The Court therefore finds no reason to disturb the rulings of the courts a quo as the petition put forward
insufficient basis to warrant their reversal.

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

G.R. No. 193108 December 10, 2014

MARILYN VICTORIO-AQUINO, Petitioner,

vs.
PACIFIC PLANS, INC. and MAMERTO A. MARCELO, JR. (Court-Appointed Rehabilitation Receiver of Pacific Plans,
Inc.), Respondents.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court which seeks to
annul and set aside the Decision 1 of the Special First Division of the Court of Appeals (CA), dated February 26,
2010, and its Resolution2 dated July 21, 2010 denying petitioner's Motion for Reconsideration in the case entitled
Marilyn Victoria-Aquino v. Pacific Plans, Inc. and Mamerto A. Marcelo, Jr., docketed as CA-G.R. SP No. 105237.

Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation or "APEC") 3 is engaged
in the business of selling pre-need plans and educational plans, including traditional open-ended educational
plans (PEPTrads). PEPTrads are educational plans where respondent guarantees to pay the planholder, without
regard to the actual cost at the time of enrolment, the full amount of tuition and other school fees of a
designated beneficiary.4Petitioner is a holder of two (2) units of respondent’s PEPTrads.5

On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing planholders as they fall
due, respondent filed a Petition for Corporate Rehabilitation with the Regional Trial Court (Rehabilitation Court),
praying that it be placed under rehabilitation and suspension of payments pursuant to Presidential Decree (P.D.)
No. 902-A, as amended, in relation to the Interim Rules of Procedure on Corporate Rehabilitation (Interim
Rules).6 At the time of filing of the Petition for Corporate Rehabilitation, respondent had more or less thirty four
thousand (34,000) outstanding PEPTrads.7

On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the suspension of payments of the
obligations of respondent and ordering all creditors and interested parties to file their comments/oppositions,
respectively, to the Petition for Corporate Rehabilitation. 8 The same Order also appointed respondent Mamerto
A. Marcelo (Rehabilitation Receiver) as the rehabilitation receiver and set the initial hearing of the case on May 25,
2005.9

Pursuant to the prevailing rules on corporate rehabilitation, respondent submitted to the Rehabilitation Court its
proposed rehabilitation plan. Under the terms thereof, respondent proposed the implementation of a
"Swap,"10 which will essentially give the planholder a means to exit from the PEPTrads at terms and conditions
relative to a termination value that is more advantageous than those provided under the educational plan in case
of voluntary termination.11

Page 319 of 343

On February 16, 2006, the Rehabilitation Receiver submitted an Alternative Rehabilitation Plan (ARP) for the
approval of the Rehabilitation Court. Under the ARP, the benefits under the PEP Trads shall be translated into
fixed-value benefits as of December 31, 2004, which will be termed as Base Year-end 2004 Entitlement, and shall
be computed as follows: (i) for availing plan holders, based on fifty-percent (50%) of Average School Fee of SY
2005-2006 for every remaining year of availment; (ii) for nonavailing (Group 1) plan holders, 12 based on the higher
of Base Year-end 2004 Entitlement under the Rehabilitation Proposal or fifty-percent (50%) of Average School
Fee of SY 2005-2006 for every year of availment; and (iii) for non-availing (Group 2) plan holders,13 based on the
planholders’ contributions with seven percent (7%) net interest per annum from date of full payment on record to
December 31, 2004.14 The Base Year-end Entitlement will be covered by a Rehabilitation Plan Agreement in lieu of
a fixed-value plan.15

For petitioner, she is entitled toreceive an aggregate amount consisting of: (a) the value of her total contributions
plus interest at the rate of seven percent (7%) from the date of full payment until December 31, 2005 (Net
Translated Value); and (b) interest on the Net Translated Value at the annual rate of seven percent (7%) from
January 1, 2006 until 2010.16

The ARP also provided for tuition support for each enrolment period until SY 2009-2010 depending on the
prevailing market rate of the NAPOCOR Bonds and Peso-Dollar exchange rate.17 The tuition support is computed
as the lesser of the remaining balance of Base Year-end 2004 Entitlement, the last-term tuition or reimbursement
on record and the following tuition support ceiling:

Availment Mode Ceiling (in Php)

Annual ₱20,000.00

Semester ₱10,000.00

Trimester ₱6,000.0018

These tuition support payments are considered advances from the Base Year-end 2004 Entitlement.19

As to the funding for the tuition support, the same shall be sourced from either two (2) ways:

(1) Outright sale of the NAPOCOR bonds and conversion of Dollar proceeds to Peso, up to the equivalent of the
tuition support requirements. The payment of the tuition support will be dependent on the terms and exchange
rate under which the bonds are liquidated; or

(2) Forward sale of the underlying Dollars to a financial institution, which then issues notes credit linked with
NAPOCOR Bonds. The notes can then be sold to interested financial institution to provide for liquidity to fund the
requirements for tuition support.20

The creditors/oppositors did not oppose/comment on the Rehabilitation Receiver’s ARP, although the Parents
Enabling Parents Coalition, Inc. (PEPCI) filed with the CA, a Petition for Certiorari with Application for a TRO/Writ
of Preliminary Injunction dated February 10, 2006. As no TRO/Writ of Preliminary Injunction has been issued
against the conduct of further proceedings, on April 27, 2006, the Court issued a Decision21 approving the ARP,
which cradled several appeals filed with the CA, and later on, to this Court that are still pending resolution. 22

Nevertheless, respondent commenced with the implementation of its ARP in coordination with, and with
clearance from, the Rehabilitation Receiver. 23

In the meantime, the value of the Philippine Peso strengthened and appreciated. In view of this development, and
considering that the trust fund of respondent is mainly composed of NAPOCOR bonds that are denominated in
US Dollars, respondent submitted a manifestation with the Rehabilitation Court on February 29, 2008, stating that
the continued appreciation of the Philippine Peso has grossly affected the value of the U.S. Dollar-denominated
NAPOCOR bonds, which stood as security for the payment of the Net TranslatedValues of the PEPTrads. 24

Page 320 of 343

Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to Admit dated March 7, 2008, echoing
the earlier tenor and substance of respondent’s manifestation, and praying that the Modified Rehabilitation Plan
(MRP) be approved by the Rehabilitation Court. Under the MRP, the ARP previously approved by the
Rehabilitation Court is modified as follows: (a) suspension of the tuition support; (b) converting the Philippine
Peso liabilities to U.S. Dollar liabilities by assigning to each planholder a share of the remaining asset in
proportion to the share of liabilities in 2010; and (c) payments of the trust fund assets in U.S. Dollars at maturity. 25

After the submission of comments/opposition by the concerned parties, the Rehabilitation Court issued a
Resolution26 dated July 28, 2008 approving the MRP. In approving the same, the Rehabilitation Court reasoned
that in view of the "cram down" power of the rehabilitation court under Section 23 of the Interim Rules, courts
have the power to approve a rehabilitation plan over the objection of creditors and even when such proposed
rehabilitation plan involvesthe impairment of contractual obligations. 27

Petitioner questioned the approval of the MRP before the CA on September 26, 2008. It likewise prayed for the
issuance of a TRO and a writ of preliminary injunction to stay the execution of the Resolution dated July 28,
2008.28

In dismissing or denying the Petition for Review, the CA held that: (a) petitioner did not pay the proper amount of
docket fees; (b) a Petition for Review under Rule 43 is an improper remedy to question the approval of a
modified rehabilitation plan; (c) contrary to petitioner’s claim, the alterations in the MRP are consistent with the
goalsof the ARP; and (d) the approval of the MRP did not amount to an impairment of the contract between
petitioner and respondent. The falloof the assailed Decision 29 states:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DENYING or DISMISSING the
petition for review filed in this case and AFFIRMING the corporate rehabilitation Court’s Resolution dated July 28,
2008 in Special Proceeding No. M-6059.30 Unfortunately for petitioner, despite its motion for reconsideration, the
CA denied the same on July 21, 2010.31

Hence, this Petition for Review on Certiorariraising the following grounds:

The Court of Appeals rendered a decision contrary to law and not in accord with the applicable decisions of the
Supreme Court when it sustained the Rehabilitation Court’s approval of the Modified Rehabilitation Plan.

II

The Court of Appeals rendered a decision contrary to law when it ruled that a Petition for Review was an
improper remedy to question a final order of the Rehabilitation Court approving the Modified Rehabilitation Plan.

III

The Court of Appeals rendered a decision not in accord with the issuances of the Supreme Court and the usual
course of judicial proceedings when it declared that Petitioner had not paid the proper amount of filing and
docket fees, despite the fact that, as clearly shown in the receipts presented by petitioner, the proper amount of
filing fees were paid.32

In its Comment dated October 23, 2006, respondent raised various procedural infirmities on the petition
warranting its dismissal, to wit: (1) the assailed decision has become final and executory for failure of petitioner to
timely serve a copy of the Petition for Time upon the CA in violation of Section 3, Rule 45 of the Rules of Court;
(2) petitioner’s motion for reconsideration on the questioned decision raises no new arguments; thus, is merely
pro formaand did not toll the running of the reglementary period; (3) a petition for review under Rule 43 of the
Rules of Court is an improper mode to question the MRP; and (4) petitioner failed to pay the appropriate amount
of docket fees when she filed the Petition for Review with the CA.33

Page 321 of 343

On procedural grounds, this Court finds for the petitioner.

First. Respondent asseverates that the CA correctly held that the Petition for Review under Rule 43 of the Rules of
Court is an improper mode to question the Resolution approving the MRP, since the same constitutes merely as
an interlocutory order and, therefore, a proper subject of a certiorari case under Rule 65 of the Rules of Court. On
the other hand, petitioner counters that such Resolution isa final order with respect to the approval of the MRP;
hence, her recourse to a Petition for Review under Rule 43 of the Rules of Court was proper. Petitioner further
argues that such remedy is clearly in line with the directive of AM No. 04-9-07-SC,34 which took effect on October
15, 2004 and, therefore, was the correct rule on appeals prevailing at the time petitioner filed her petition with the
CA.35

Petitioner’s contention is impressed with merit.

It bears emphasis that the governing rule at the time respondent filed its petition for rehabilitation was the
Interim Rules, which does not expressly state the mode of appeal from the decisions, orders and resolutions of
the Rehabilitation Court, either prior or after the approval of the rehabilitation plan. Accordingly, this Court issued
a Resolution, A.M. No. 04-9-07-SC,36 which lays down the proper mode of appeal in cases involving corporate
rehabilitation and intra-corporate controversies in order to prevent cluttering the dockets of the courts with
appeals and/or petitions for certiorari. The first paragraph thereof provides:

1. All decisions and final orders in cases falling under the Interim Rules of Corporate Rehabilitation and the Interim
Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799 shall be appealable to
the Court of Appeals through a petition for review under Rule 43 of the Rules of Court. 37

Under the said Resolution, all decisions and final orders of the rehabilitation court, regardless of whether they are
issued before or after the approval of the rehabilitation court, shall be brought on appeal to the CA via a petition
for review under Rule 43 of the Rules of Court.

Subsequently, the Supreme Court issued A.M. No. 00-8-10-SC38 (Rehabilitation Rules), which took effect on
January 16, 2009, embodying the rehabilitation rules applicable to petitions for rehabilitation of corporations,
partnerships and associations pursuant to P.D. No. 902-A, as amended. Section 1, Rule 8 thereof unequivocally
states:

SEC. 1. Motion for Reconsideration. — A party may file a motion for reconsideration of any order issuedby the
court prior to the approval of the rehabilitation plan. No relief can be extended to the party aggrieved by the
court’s order on the motion through a special civil action for certiorari under Rule 65 of the Rules of Court. Such
order can only be elevated to the Court of Appeals as an assigned error in the petition for review of the decision
or order approving or disapproving the rehabilitation plan.

An order issued after the approval of the rehabilitation plan can be reviewed only through a special civil action
for certiorari under Rule 65 of the Rules of Court. 39

While We agree with respondent that the later rule states that orders issued after the approval of the
rehabilitation plan can be reviewed only through a special civil action for certiorari under Rule 65 of the Rules of
Court, such rule does not apply to the instant case as the same was not yet in effect at the time petitioner filed
her Petition for Review with the CA. Stated otherwise, the prevailing law at the time petitioner filed said petition
with the CA is the Interim Rules as well as A.M. No. 04-9-07-SC. As such, the proper remedy of appeal from all
decisions and final orders of the RTC was Rule 43 of the Rules of Court, and not Rule 65 thereof.

In any case, We cannot also subscribe to respondent’s view that the approval of the MRP is merely an
interlocutory order. In Alma Jose v. Javellana, 40 We have already defined a final order as one that puts an end to
the particular matter involved, or settles definitely the matter therein disposed of, as to leave nothing for the trial
court to do other than to execute the order. 41 Here, it cannot be gainsaid that the Resolution approving the MRP
is a final order with respect to the validity thereof, specifically on the following issues: (1) the suspension of the
tuition support; (2) conversion of Philippine Peso entitlements to U.S. Dollar entitlements; and (3) the payments in
Page 322 of 343
U.S. Dollars upon maturity in 2010. In this regard, the issue as to its alleged infringement on the non-impairment
clause under the Constitution has likewise been settled. The doctrine laid down in New Frontier Sugar Corp. v.
Regional Trial Court Branch 39, Iloilo City, 42 cannot be used to counter the foregoing because in that case, the
Court merely stressed that an original action for certiorarimay be directed against an interlocutory order of the
lower court prior to an appeal from the judgment; or where there is no appeal or any plain, speedy or adequate
remedy.43 New Frontier does not categorically preclude the filing of a petition for review under Rule43 for
decisions or orders issued after the approval of the rehabilitation plan such as a modification thereof.

Second. We find respondent’s contention on the non-payment of the docket fees devoid of merit because the
records rather show that petitioner had, in fact, paid the appropriate amount of docket fees for her Petition with
the CA and her application for a TRO on September 12, 2008. To support this allegation, petitioner attached
copies of official receipts, representing the fees she has paid in the aggregate amount of Four Thousand Six
Hundred Eighty Pesos (₱4,680.00). Third. With respect to respondent’s allegation that petitioner violated Section
2,44 in relation to Section 3,45 Rule 45 of the Rules of Court, in particular the failure of petitioner to serve a copy
ofits petition for time with the CA within the prescribed period, the same is mislaid.

A careful examination of the records will show that said petition was personally served on the CA on August 17,
2010, within the prescribed period pursuant to Sections 2 and 3, Rule 45 of the Rules of Court. This is the most
logical explanation since the Manifestation regarding such service, together with the attached Petition for Time,
was filed on August 18, 2010. Thus, the date "August 27, 2010" on the stamp of the CA is clearly a clerical error
and respondent’s assertion that the CA was not timely served the Petition for Time is erroneous.

Similarly, owing to the significance of the issues raised in the instant case, We rule that any lapse on the filing of
the motion for reconsideration with the CA is not grave enough to dismiss the instant petition on technical
grounds. Moreover, it is settled that although a motion for reconsideration may merely reiterate issues already
passed upon by the court, that, by itself, does not make it pro forma. In fact, the CA did not declare said motion
for reconsideration as pro forma when it denied the same. Hence, considering that the motion for
reconsideration is not pro forma and a mere scrap of paper, its filing tolled the running period of appeal pursuant
to Section 2,46 Rule 37 of the Rules of Court.

Fourth. Anent the Verification and Certification against Forum Shopping of the instant petition, we recognize that
petitioner failed to comply with Section 6, Rule II of A.M. No. 02-8-13-SC, otherwise known as the Rules on
Notarial Practice of 2004 (Notarial Rules), which provides that in order for a jurat to be valid, the following
requirements should be present:

SEC. 6. Jurat. - "Jurat" refers to an act in which an individual on a single occasion:

(a) appears in person before the notary public and presents an instrument or document;

(b) is personally known to the notary public or identified by the notary public through competent
evidence of identityas defined by these Rules;

(c) signs the instrument ordocument in the presence of the notary; and

(d) takes an oath or affirmation before the notary public as to such instrument or document. 47 as well as
Section 12, Rule II of the Notarial Rules, which defines what constitutes competent evidence of identity, to
wit –

SEC. 12. Competent Evidence of Identity. - The phrase "competent evidence of identity" refers to the identification
of an individual based on:

(a) at least one current identification document issued by an official agency bearing the photograph and
signature of the individual; or

Page 323 of 343

 (b) the oath or affirmation of one credible witness not privy to the instrument, document or transaction
who is personally known to the notary public and who personally knows the individual, or of two credible
witnesses neither of whom is privy to the instrument, document or transaction who each personally
knows the individual and shows to the notary public documentary identification.

While we agree with the observation of respondent that in the instant Petition, the Verification and Certification
against Forum Shopping attached thereto is defective because the jurat thereof does not contain the required
competent evidence of identity of the affiant, petitioner herein, such omission may be overlooked in the name of
judicial leniency, in order to give this Court an avenue to dispose of the substantive issues of this case.

As to respondent’s allegation that the instant petition contained a false Certification of Non-Forum Shopping
since the same failed to disclose the pendency of a related petition pending before the CA, the same warrants
scant consideration.

While it would appear that there is substantial identity ofparties, since both petitioner and PEPCI are creditors of
respondent and both are questioning the Rehabilitation Court’s approval of the MRP, the identity of cause of
action is absent in the present case. An assiduous scrutiny of the respondent’s Petition for Review with the CA
and PEPCI’s Petition for Review dated September 3, 2008, also filed with the CA, will show that they raised
different causes of action. In Majority Stockholders of Ruby Industrial Corporation v. Lim, 48 we have reiterated that
no forum shopping exists when two (2) groups of oppositors in a rehabilitation case act independently of each
other, even when they have sought relief from the same appellate court, thus:

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87. Thus:

We hold that private respondents are not guilty of forum shopping. In Ramos, Sr. v. Court of Appeals, we ruled:

"The private respondents can be considered to have engaged in forum shopping if all of them, acting as one
group, filed identical special civil actions in the Court of Appeals and in this Court. There must be identity of
parties or interests represented, rights asserted and relief sought in different tribunals. In the case at bar, two
groups of private respondents appear to have acted independently of each other when they sought relief from
the appellate court. Both groups sought relief from the same tribunal.

"It would not matter even if there are several divisions in the Court of Appeals. The adverse party can always ask
for the consolidation of the two cases. x xx"

In the case at bar, private respondents represent different groups with different interests - the minority
stockholders' group, represented by private respondent Lim; the unsecured creditors group, Allied Leasing &
Finance Corporation; and the old management group. Each group has distinct rights to protect. In line with our
ruling in Ramos, the cases filed by private respondents should be consolidated. In fact, BENHAR and RUBY did
just that - in their urgent motions filed on December 1, 1993 and December 6, 1993, respectively, they prayed for
the consolidation of the cases before the Court of Appeals. 49

In any case, this Court resolves tocondone any procedural lapse in the interest of substantial justice given the
nature of business of respondent and its overreaching implication to society.To deny this Court of its duty to
resolve the substantive issues would be tantamount to judicial tragedy as planholders, like petitioner herein,
would be placed in a state of limbo as to its remedies under existing laws and jurisprudence.

Indeed, where strong considerations of substantive justice are manifest in the petition, the strict application of the
rules of procedure may be relaxed, in the exercise of its equity jurisdiction. 50 Thus, a rigid application of the rules
of procedure will not be entertained if it will only obstruct rather than serve the broader interests of justice in the
light of the prevailing circumstances in the case under consideration. 51 It is a prerogative duly embedded in
jurisprudence, as in Alcantara v. Philippine Commercial and International Bank, 52 where the Court had the
occasion to reiterate that:

Page 324 of 343

x x x In appropriate cases, the courts may liberally construe procedural rules in order to meet and advance the
cause of substantial justice. Lapses in the literal observation of a procedural rule will be overlooked when they do
not involve public policy, when they arose from an honest mistake or unforeseen accident, and when they have
not prejudiced the adverse party or deprived the court of its authority. The aforementioned conditions are
present in the case at bar. x x x x

There is ample jurisprudence holding that the subsequent and substantial compliance of an appellant may call for
the relaxation of the rules of procedure. In these cases, weruled that the subsequent submission of the missing
documents with the motion for reconsideration amounts to substantial compliance. The reasons behind the
failure of the petitioners in these two cases to comply with the required attachments were no longer scrutinized.
What we found noteworthy in each case was the fact that the petitioners therein substantially complied with the
formal requirements. We ordered the remand of the petitions in these cases to the Court of Appeals, stressing
the ruling that by precipitately dismissing the petitions "the appellate court clearly put a premium on
technicalities at the expense of a just resolution of the case."

While it is true that the rules of procedure are intended to promote rather than frustrate the ends of justice, and
the swift unclogging of court docket is a laudable objective, it nevertheless must not be met at the expense of
substantial justice. This Court has time and again reiterated the doctrine that the rules of procedure are mere
tools aimed at facilitating the attainment of justice, rather thanits frustration. A strict and rigid application of the
rules must alwaysbe eschewed when it would subvert the primary objective of the rules, that is, to enhance fair
trials and expedite justice. Technicalities should never beused to defeat the substantive rights of the other party.
Every party-litigant must be afforded the amplest opportunity for the proper and just determination of his cause,
free from the constraints of technicalities. Considering that there was substantial compliance, a liberal
interpretation of procedural rules in this labor case is more in keeping with the constitutional mandate to secure
social justice.53

Notwithstanding our liberal interpretation of the rules, the instant petition must fail on substantive grounds.

Petitioner contends that the MRP is ultra vires insofar as it reduces the original claim and even the original
amount that petitioner was to receive under the ARP. 54 She also claims that it was beyond the authority of the
Rehabilitation Court to sanction a rehabilitation plan, or the modification thereof, when the essential feature of
the plan involves forcing creditors to reduce their claims against respondent. 55

Petitioner’s argument is misplaced. The "cram-down" power of the Rehabilitation Court has long been established
and even codified under Section 23, Rule 4 of the Interim Rules, to wit: Section 23. Approval of the Rehabilitation
Plan. – The court may approve a rehabilitation plan over the opposition of creditors, holding a majority of the
total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable.

Such prerogative was carried over inthe Rehabilitation Rules, which maintains that the court may approve a
rehabilitation plan over the objection of the creditors if, in its judgment, the rehabilitation of the debtors is
feasible and the opposition of the creditors is manifestly unreasonable. The required number of creditors
opposing such plan under the Interim Rules (i.e.,those holding the majority of the total liabilities of the debtor)
was, in fact, removed. Moreover, the criteria for manifest unreasonableness is spelled out, to wit:

SEC. 11. Approval of Rehabilitation Plan. — The court may approve a rehabilitation plan even over the opposition
of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the
creditors is manifestly unreasonable. The opposition of the creditors is manifestly unreasonable if the following
are present:

(a) The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3; 56 (b) The
rehabilitation plan would provide the objecting class of creditors with payments whose present value
projected in the plan would be greater than that which they would have received if the assets of the
debtor were sold by a liquidator within a six (6)month period from the date of filing of the petition; and

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 (c) The rehabilitation receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are not
impaired. The court shall also issue the necessary orders or processes for its immediate and successful
implementation. It may impose such terms, conditions, or restrictions as the effective implementation and
monitoring thereof may reasonably require, or for the protection and preservation of the interests of the creditors
should the plan fail.57

This legal precept is not novel and has, in fact, been reinforced in recent decisions such as in Bank of the
Philippine Islands v. Sarabia Manor Hotel Corporation, 58 where the Court elucidated the rationale behind Section
23, Rule 4 of the Interim Rules, thus:

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules) states that a rehabilitation plan may be approved even over the
opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that
rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable. Also known as the "cram-
down" clause, this provision, which is currently incorporated in the FRIA, is necessary to curb the majority
creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to
the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors toaccept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery. 59

as well as in Pryce Corporation v. China Banking Corporation,60 to wit:

In any case, the Interim Rules or the rules in effect at the time the petition for corporate rehabilitation was filed in
2004 adopts the cramdown principle which "consists of two things: (i) approval despite opposition and (ii) binding
effect of the approved plan x x x."

First, the Interim Rules allows the rehabilitation court to "approve a rehabilitation plan even over the opposition
of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the
debtor is feasible and the opposition of the creditors is manifestly unreasonable."

Second, it also provides that upon approval by the court, the rehabilitation plan and its provisions "shall be
binding upon the debtor and all persons who may be affected by it, including the creditors, whether or not such
persons have participated inthe proceedings or opposed the plan or whether or not their claims have been
scheduled."

Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final and executory resulting
from the resolution of BPI v. Pryce Corporation docketed as G.R. No. 180316, binds all creditors including
respondent China Banking Corporation.61

Based on the aforequoted doctrines, petitioner’s outright censure of the concept of the cram-down power of the
rehabilitation court cannot be countenanced. To adhere to the reasoning of petitioner would be a step backward
— a futile attempt to address an outdated set of challenges. It is undeniable that there is a need to move to a
regime of modern restructuring, cram-down and court supervision in the matter of corporation rehabilitation in
order to address the greater interest of the public. This is clearly manifested in Section 64 of Republic Act (R.A.)
No. 10142, otherwise known as Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the latest law on
corporate rehabilitation and insolvency, thus:

Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and
stakeholders that the Plan is ready for their examination. Within twenty (2Q) days from the said notification, the
rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of voting on the
approval of the Plan. The Plan shall be deemed rejected unless approved by all classes of creditors w hose rights
are adversely modified or affected by the Plan. For purposes of this section,the Plan is deemed tohave been
approved by a class of creditors if members of the said class holding more than fifty percent (50%) of the total
claims of the said class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of
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their respective claims based on the registry of claims submitted by the rehabilitation receiver pursuant to Section
44 hereof.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the
following circumstances are present:

(a)The Rehabilitation Plan complies with the requirements specified in this Act;

(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling interestas a
result of the Rehabilitation Plan; and

(d) The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which
has a net present value greater than that which they would have received if the debtor were under
liquidation.62

While the voice and participation of the creditors is crucial in the determination of the viability of the
rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the interests of all
stakeholders is the ultimate and prime consideration. Thus, while we recognize the predisposition of the
planholders in vacillating on the enforcement of the MRP, since the terms and conditions stated therein have
been fundamentally changed from those stated in the Original and Amended Rehabilitation Plan, the MRP
cannot be considered an abrogation of rights to the planholders/creditors.

First. An examination of the changes proposed in the MRP would confirm that the same is, in fact, an effective risk
management tool intended to serve both the interests of respondent and its planholders/creditors.

It is a matter of fact and record that the Philippine Peso unexpectedly and uncharacteristically strengthened and
appreciated from Fifty-Two and 02/100 Pesos (Php52.02) to One U.S. Dollar (USD1.00) at the time of the approval
of the ARP to Forty and (63)/100 Pesos (Php40.63) to One U.S. Dollar (USD1.00) as of March 7, 2008, the day the
Rehabilitation Receiver filed his Manifestation with Motion to Admit praying for the approval of the MRP. 63 There
is no gainsaying that during this period, the value of the U.S. Dollar-denominated NAPOCOR bonds — the assets
covering the trust fund subject of the traditional education plan — has already been substantially diluted because
of the stronger value of the Philippine Peso vis-à-visthe U.S. Dollar from the time of the approval of the ARP. 64 As
succinctly held by the RTC in its Resolution dated July 28, 2008, to wit:

First, there is in tr[u]th no quibble that the Philippine Peso has behaved in an uncharacteristic mannerby
appreciating significantly vis-àvis the United States Dollar. This fact is not disputed by any of the parties. Further,
the Court takes cognizance that at the time the Alternative Rehabilitation Plan was approved on 27 April 2006,
the exchange rate was Php52.02/US$1.00. As of 15 July 2008, the exchange rate was Php45.35/US$1.00, or an
appreciation of atleast fourteen percent (14%). Since the NAPOCOR Bonds are denominated in United States
dollars, it means that the NAPOCOR Bonds have losttheir original value by at least fourteen percent (14%) since
the approval of the Alternative Rehabilitation Plan on 27 April 2006. Ergo, the continued payment of tuition
support in Philippine Pesos will lead to the certainty of the trust fund being substantially diluted when the
planholders avail of the same upon maturity of the NAPOCOR Bonds in 2010.65

This defense mechanism is reasonable because sustaining the current terms of the ARP would render the trust
fund of no value given the high probability of its dilution. Resultantly, the very foundation of the rehabilitation
plan, which is to minimize the loss of all stakeholders, would be rendered in futile since the trust funds may no
longer be sufficient to meet the basic terms of the ARP.

In addition, the MRP merely establishes the planholders’ claim on a percentage/pro rata share of the assets of the
trust fund. It does not, in any way, diminish the value of their claims or their share in the proverbial pie. The
propriety of this theory was recognized by the Rehabilitation Court, to wit:

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Second, the conversion of the Philippine Peso entitlements into United States Dollar entitlements would not
diminish the pro rata share of the planholders. Each planholder would still receive his proportionate share of the
pie, so to speak, albeitin United States Dollars. The said conversion would merely ensure that regardless of the
performance of the Philippine Pesos, planholders of petitioner PPI are guaranteed payment upon maturity of the
NAPOCOR Bonds, without fear that their share will be substantially diluted. In fact, the planholders may even
benefit from this modification in the rehabilitation plan if the United States dollars appreciates in 2010. 66

As can be gleaned from the foregoing, the modification guarantees that each planholder has an adequate return
on his/her investment regardless of changes in the surge of the Philippine economy. 67

We, therefore, agree with respondent that the proposed modification seeks to establish a balance between
adequate returns to the planholders/creditors, while ensuring that respondent shall be an on-going concern that
can eventually undergo normal operations after the implementation of the MRP. 68

Second. The recommendation of the Rehabilitation Receiver cannot simply be unsung without violating the basic
tenet of Section 14, Rule 4 of the Interim Rules, which provides the powers and functions of the Rehabilitation
Receiver, thus:

Sec. 14. Powers and Functions of the Rehabilitation Receiver. - The Rehabilitation Receiver shall nottake over the
management and control of the debtor but shall closely oversee and monitor the operations of the debtor during
the pendency of the proceedings, and for this purpose shall have the powers, duties and functions of a receiver
under Presidential Decree No. 902-A, as amended, and the Rules of Court.

x x x Accordingly, he shall have the following powers and functions:

xxxx

(j) To monitor the operations of the debtor and to immediately report to the court any material adverse change
in the debtor's business;

xxxx

(l) To determine and recommend to the court the best way to salvage and protect the interests of the creditors,
stockholders, and the general public;

xxxx

(v) To recommend any modification of an approved rehabilitation plan as he may deem appropriate;

(w) To bring to the attention of the court any material change affecting the debtor's ability to meet the
obligations under the rehabilitation plan;

x x x.69

As correctly recognized by the Rehabilitation Court in its Resolution dated July 28, 2008, the Rehabilitation
Receiver has the duty and authority to recommend any modification of an approved rehabilitation plan as he may
deem appropriate and for the purpose of achieving the desired targets or goals set forth therein, thus:

It is the strenuous proposition of the CARR that under the Interim Rules, he has the duty to recommend any
modification of an approved rehabilitation plan as he may been appropriate. Ex concesso, the Court recognizes
that under Rule 4, Section 26 of the Interim Rules, an approved rehabilitation plan may be modified if, in the
judgment of the Court, such modification is necessary to achieve the desired targets or goals set forth therein. 70

The Rehabilitation Rules allow the modification and alteration of the rehabilitation plan precisely because
ofconditions that may supervene or affect the implementation thereof subsequent to its approval. In the case at
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bar, to force through with the tuition support would surely jeopardize the implementation of the ARP in the long-
run since it would not be feasible to keep on liquidating the NAPOCOR Bonds.

Third. We confirm that there is a substantial likelihood for respondent to be successfully rehabilitated considering
that its business remains viable and is operating on a going-concern premise.

A careful reading of the records will show that respondent’s liquidity problems were mostly caused by the
deregulation of the education sector, which triggered sharp increases in tuition fees of schools and universities
beyond what was projected by pre-need companies dealing with traditional educational plans. Surely, we are
mindful of the financial distress in 1997, which has destroyed various institutions not only in the Philippines but
across Asia, further compromising the pre-need industry’s ability to meet its obligations under the PEPTrads. The
surrounding circumstances of the time was peculiar and may no longer be pertinent at present.

Thus, pointing fingers to respondent at this point for its alleged mismanagement of assets would be irrational,
and even counter-productive, because the feasibility of respondent’s rehabilitation has already been duly
established by the Rehabilitation Court. A subsequent allegation to the contrary has no leg to stand on.
Conversely, by virtue of the corporate rehabilitation, respondentwill have enough breathing room to improve its
operations in order to sustain its business operations and at the same time, settle all its outstanding obligations in
a just and fair manner, in accordance with the MRP. In this regard, We find reason in respondent’s contention that
the MRP will not only be beneficial to itself, but also to its planholders and creditors as well. Anent petitioner’s
argument that the approval of the MRP is offensive to the non-impairment clause of the Constitution, the same
fails to persuade.

Petitioner’s interpretation of Section 37 of the Rehabilitation Rules vis-à-vis the means within which a
rehabilitation plan may be pursued, is misplaced. As held in a plethora of cases, a rehabilitation plan may involve
a reduction of liability. On this score, the principle enunciated in Pacific Wide Realty and Development
Corporation v. Puerto Azul Land, Inc.,71 is instructive, thus –

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per findings of fact of the
RTC and as affirmed by the CA, the restructuring of the debts of PALI would not be prejudicial to the interest of
PWRDC as a secured creditor. Enlightening is the observation of the CA in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as found by
the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its creditors at deep discounts
of as much as 85%. Meaning, PALI’s creditors accepted only 15% of their credit’s value. Stated otherwise, if PALI’s
creditors are in a position to accept 15% of their credit’s value, with more reason that they should be able to
accept 50% thereof as full settlement by their debtor. x x x. 72

Here, petitioner’s claim is not cancelled or obliterated all together. 1awp++i1 Contrary to her view, petitioner’s
claim isin fact restructured in a way that would allow respondent to revive its financial health while offering the
optimal returns to its clients.

It is undisputable that the corporation is in the process of corporate rehabilitation precisely because it is
undergoing financial distress. Petitioner cannot expect to receive the contracted amount owed by respondent
because a modification of the terms and conditions of the contract is certainly foreseeable and reasonable in a
corporate rehabilitation case, as correctly held by the Rehabilitation Court, to wit:

x x x It is an established principle in rehabilitation proceedings that rehabilitation courts have the cram down
power to approve rehabilitation plans even over the objections of creditors, which cram down power shall
nonetheless bind the latter. In fact, the CARR is given the authority to "notify counterparties and the court asto
contracts that the debtor has decided to continue to perform or breach." A fortiori, the mere impairment of
contracts is not a justification to question the modification of a rehabilitation plan because the very nature of
rehabilitation proceedings sometimes necessitates such a course of action. 73

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Indeed, the rights of petitioner arising from the contracts it entered with respondent are not in any way
weakened by the approval of the ARP, and then the MRP, despiteany reduction in the amount of the obligation
due to petitioner. As enunciated in Pacific Wide, 74 the reduction of the debt of the debtor is one of the essential
features of a rehabilitation case, and is not considered prejudicial to the interest of a secured creditor, thus:

We find nothing onerous in the terms of PALI's rehabilitation plan. The Interim Rules on Corporate Rehabilitation
provides for means of execution of the rehabilitation plan, which may include, among others, the conversion of
the debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the
controlling interest.

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per findings offact of the
RTC and as affirmed by the CA, the restructuring of the debts of PALI would notbe prejudicial to the interest of
PWRDC as a secured creditor. Enlightening is the observation of the CA in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as found by
the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its creditors at deep discounts
of as much as 85%. Meaning, PALI's creditors accepted only 15% of their credit's value. Stated otherwise, if PALI's
creditors are in a position to accept 15% of their credit's value, with more reason that they should be able to
accept 50% thereof as full settlement by their debtor. x x x.

We also find no merit in PWRDC’s contention that there is a violation of the impairment clause. Section 10, Article
III of the Constitution mandates that no law impairing the obligations of contract shall be passed. This case does
not involve a law or an executive issuance declaring the modification of the contract among debtor PALI, its
creditors and its accommodation mortgagors. Thus, the non-impairment clause may not be invoked.
Furthermore, as held in Oposa v. Factoran, Jr.even assuming that the same may be invoked, the non-impairment
clause must yield to the police power of the State. Property rights and contractual rights are not absolute. The
constitutional guaranty of nonimpairment of obligations is limited by the exercise of the police power of the State
for the common good of the general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors, employees, and the
economy in general.1âwphi1 The court may approve a rehabilitation plan evenover the opposition of creditors
holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor isfeasible
and the opposition of the creditors is manifestly unreasonable. The rehabilitation plan, once approved, is binding
upon the debtor and all persons who may be affected by it, including the creditors, whether or not such persons
have participated in the proceedings or have opposed the plan or whether or not their claims have been
scheduled.75

Similarly, the reasoning laid down by the CA for the application of the cram-down power of the Rehabilitation
Court is enlightening, thus:

This Court likewise rejects petitioner Aquino’s claims that the Modified Rehabilitation Plan constitutes an
impairment of contracts. The non-impairment clause under the Constitution applies only to the exercise of
legislative power. It does not apply to the Rehabilitation Court which exercises judicial power over the
rehabilitation proceedings. As held by the Supreme Court in Bank of the Philippine Islands vs. Securities and
Exchange Commission, [G.R. No. 164641, December 20, 2007:

"The Court reiterates that the SEC’s approval of the Rehabilitation Plan did not impair BPI’s right to contract. As
correctly contended by private respondents, the nonimpairment clause is a limit on the exercise of legislative
power and not of judicial or quasi-judicial power. The SEC, through the hearing panel that heard the petition for
approval of the Rehabilitation Plan, was acting as a quasi judicial body and thus, its order approving the plan
cannot constitute an impairment of the right and the freedom to contract." 76

In view of all of the foregoing, We find no basis to overturn the findings of the CA with respect to the substantive
issues in this case. Accordingly, the prayer for the issuance of a TRO and/or a writ of preliminary injunction must
necessarily fail.
Page 330 of 343
A final note. The evolving times of corporate rehabilitation, owing to the rise and fall of economic activity over
time, calls on the Judiciary to take an active role in filling in the gaps of the law pertaining to this issue as the
inimitable factual milieu of each case would require a different approach in the application of prevailing laws,
rules and regulations on corporate rehabilitation. In the case at bar, we hold that the modification of the
rehabilitation plan is a risk management tool to address the volatility of the exchange rate of the Philippine Peso
vis-à-vis the U.S. Dollars, with the goal of ensuring that all planholders or creditors receive adequate returns
regardless of the tides of the Philippine market by making payment in U.S. Dollars. This plan would prevent the
trust fund of respondent from being diluted due to the appreciation of the Philippine Peso and assure that all
planholders and creditors shall receive payment upon maturity of the NAPOCOR bonds in the most equitable
manner.

WHEREFORE, the petition is DENIED. The February 26, 2010 Decision and July 21, 2010 Resolution of the Court of
Appeals in CA-G.R. SP No. 105237 are hereby AFFIRMED.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

G.R. No. 205469

BPI FAMILY SAVINGS BANK, INC., Petitioner,

vs.
ST. MICHAEL MEDICAL CENTER, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 assailing the Decision2 dated August 30, 2012 and the
Resolution3 dated January 18, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 121004 which affirmed the
approval of the Rehabilitation Plan of respondent St. Michael Medical Center, Inc. (SMMCI) by the Regional Trial
Court of Imus, Cavite, Branch 21 (RTC) through its Order 4 dated August 4, 2011 in SEC Case No. 086-10.

The Facts

Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St. Michael Diagnostic and
Skin Care Laboratory Services and Hospital (St. Michael Hospital), a 5-storey secondary level hospital built on their
property located in Molino 2, Bacoor, Cavite. With a vision to upgrade St. Michael Hospital into a modern, well-
equipped and full service tertiary 11-storey hospital, Sps. Rodil purchased two (2) parcels of land adjoining their
existing property and, on May 22, 2003, incorporated SMMCI, with which entity they planned to eventually
consolidate St. Michael Hospital’s operations. SMMCI had an initial capital of 2,000,000.00 which was later
increased to 53,500,000.00, 94.49% of which outstanding capital stock, or 50,553,000.00, was subscribed and paid
by Sps. Rodil.5

In May 2004, construction of a new hospital building on the adjoining properties commenced, with Sps. Rodil
contributing personal funds as initial capital for the project which was estimated to cost at least
100,000,000.00.6 To finance the costs of construction, SMMCI applied for a loan with petitioner BPI Family Savings
Bank, Inc. (BPI Family) which gave a credit line of up to 35,000,000.00, 7 secured by a Real Estate
Mortgage8 (mortgage) over three (3) parcels of land 9 belonging to Sps. Rodil, on a portion of which stands the
hospital building being constructed. SMMCI was able to draw the aggregate amount of 23,700,000.00, 10 with
interest at the rate of 10.25% per annum (p.a.) and a late payment charge of 3% per month accruing on the
overdue amount, for which Sps. Rodil, who agreed to be co-borrowers on the loan, executed and signed a
Promissory Note.11

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In the meantime, after suffering financial losses due to problems with the first building contractor, 12 Sps. Rodil
temporarily deferred the original construction plans for the 11-storey hospital building and, instead, engaged the
services of another contractor for the completion of the remaining structural works of the unfinished building up
to the 5th floor. In this regard, they spent an additional 25,000,000.00, or a total of 55,000,000.00 for the
construction. The lack of funds for the finishing works of the 3rd, 4th and 5th floors, however, kept the new
building from becoming completely functional and, in turn, hampered the plans for the physical transfer of St.
Michael Hospital’s operations to SMMCI. Nevertheless, using hospital- generated revenues, Sps. Rodil were still
able to purchase new equipment and machinery for St. Michael Hospital valued in excess of 20,000,000.00. 13

Although the finishing works were later resumed and some of the hospital operations were eventually transferred
to the completed first two floors of the new building, as of May 2006, SMMCI was still neither operational nor
earning revenues. Hence, it was only able to pay the interest on its BPI Family loan, or the amount of 3,000,000.00
over a two-year period, from the income of St. Michael Hospital. 14

On September 25, 2009, BPI Family demanded immediate payment of the entire loan obligation 15 and, soon after,
filed a petition for extrajudicial foreclosure 16 of the real properties covered by the mortgage. The auction sale was
scheduled on December 11, 2009, which was postponed to February 15, 2010 with the conformity of BPI Family. 17

On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation18 (Rehabilitation Petition), docketed as
SEC Case No. 086-10, before the RTC, with prayer for the issuance of a Stay Order as it foresaw the impossibility
of meeting its obligation to BPI Family, its purported sole creditor. 19

In the said petition, SMMCI claimed that it had to defer the construction of the projected 11-storey hospital
building due to the problems it had with its first contractor as well as the rise of the cost of construction materials.
As of date, only two (2) floors of the new building are functional, in which some of the operations of St. Michael
had already been transferred.20

Also, it was alleged that more than 66,000,000.00 had been spent for the construction of the existing structure (in
excess of its proportionate share of the original estimated cost for the entire project), said amount having come
from the personal funds of Sps. Rodil and/or income generated by St. Michael Hospital, aside from the drawings
from the credit line with BPI Family. At the same time, Sps. Rodil continued to shoulder the costs of equipment
and machinery amounting to 20,000,000.00, in order to build up the hospital’s medical capabilities. However,
since SMMCI was neither operational nor earning revenues, it could only pay interest on the BPI Family loan,
using St. Michael Hospital’s income, over a two-year period.21

Further, it was averred that while St. Michael Hospital – whose operations were to be eventually absorbed by
SMMCI – was operating profitably, it was saddled with the burden of paying the loan obligation of SMMCI and
Sps. Rodil to BPI Family, which it cannot service together with its current obligations to other persons and/or
entities. The situation became even more difficult when the bank called the entire loan obligation which, as of
November 16, 2009, amounted to 52,784,589.34 (net of unapplied payment), consisting of: (a) the principal of
23,700,000.00; (b) accrued interest of 7,048,152.74; and (c) late payment charges amounting to 23,510,400.00.
While several persons approached Sps. Rodil signifying their interest to invest in the corporation, they needed
enough time to complete their audit and due diligence of the company,22 hence, the Rehabilitation Petition.

In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the
mortgage and (b) to agree to a moratorium of at least two (2) years during which SMMCI – either through St.
Michael Hospital or its successor – will retire all other obligations. After which, SMMCI can then start servicing its
loan obligation to the bank under a mutually acceptable restructuring agreement. 24 SMMCI declared that it
intends to conclude pending negotiations for investments offered by a group of medical doctors whose capital
infusion shall be used (a) to complete the finishing requirements for the 3rd and 5th floors of the new building;
(b) to renovate the old 5- storey building where St. Michael Hospital operates; and (c) to pay, in whole or in part,
the bank loan with the view of finally integrating St. Michael Hospital with SMMCI. 25

The Proceedings Before the RTC

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Finding the Rehabilitation Petition to be sufficient in form and substance, the RTC issued a Stay Order 26 on
August 16, 2010. After the initial hearing on October 5, 2010, and the filing of comments to the said petition, 27 the
same was referred to the court-appointed Rehabilitation Receiver, Dr. Uriel S. Halum (Dr. Halum), who submitted
in due time his Report and Recommendations 28 (Receiver’s Report) to the RTC on February 17, 2011.29

In the said report, Dr. Halum gave credence to the feasibility study conducted by Mrs. Nenita Alibangbang (Mrs.
Alibangbang), a certified public accountant and Dean of the College of Accountancy at the University of
Perpetual Help Dalta, who was commissioned in 2008 to do a study on the viability of the project, finding that the
same was feasible given that St. Michael Hospital, whose operations SMMCI will eventually absorb, registered
outstanding revenue performance for the last seven years of its operation with an average growth rate of 42.21%
annually.30Accordingly, Dr. Halum found that SMMCI may be rehabilitated because it is a viable option but,
nevertheless, opined that it will take more than what it had proposed to successfully bring the company back to
good financial health considering the finding that its obligation actually extends beyond the bank, and also
includes accounts payable due to suppliers and informal lenders. 31 Thus, he made the following
recommendations:

1.The two-year moratorium period to pay the bank is not enough. The Court should seriously consider
extending it by another three years or a total of five (5) years, at least. The bank, whose loan is secured
by mortgages on three prime parcels of land with improvements should discuss restructuring the loan
with the creditors with the end in view of stretching the term and allowing for more flexible rate.

2.Obligations to other creditors such as the suppliers and lenders can be serviced at once. Given the
performance of the hospital, the undersigned reasonably believes that these obligations can be settled in
next three (3) years. These accounts can be paid proportionately provided that [SMMCI] should be
allowed to re- structure these accounts to allow for longer and more convenient payment terms.

3.[SMMCI] should be allowed to spend for the improvement of the building but not necessarily
continuing with the planned 11-storey building. It should make do with what it has but should be
permitted to spend reasonable part of the hospital’s revenues to improve the facilities. For instance, we
recommend that the fifth floor of the building should be finished to provide for an intensive care unit or
ICU with equipments (sic) and required facilities. [SMMCI] should also consider spending ( sic) an elevator
to make access to and from the higher floors convenient to patients, doctors, nurses and guests.
Incidentally, these improvements should be programmed for the next two to three years. Given the
budgetary constraints of the hospital, doing all these improvements all at once would be impossible.

4.Finally, [SMMCI] should provide for details on its statements regarding the prospective investors. It ( sic)
true, or in case it happens, then this fresh capital should be used partly to pay the bank and the rest to
improve the hospital to make it more competitive with the nearby medical service providers. 32

On May 26, 2011, the RTC issued an order requiring the counsels of the creditors/oppositors to file their
comments to the Receiver’s Report within ten (10) days from notice, but only counsel for South East Star
Enterprises complied.33

The RTC Ruling

In an Order34 dated August 4, 2011, the RTC approved the Rehabilitation Plan with the modifications
recommended by the Rehabilitation Receiver and thus, ordered: ( a) a five-year moratorium on SMMCI’s bank
loan; (b) a restructuring and payment of obligations to other creditors such as suppliers and lenders; ( c) a
programmed spending of a reasonable part of the hospital’s revenues for the finishing of the 5th floor and the
improvement of hospital facilities in the next two or three years; and ( d) use of fresh capital from prospective
investors to partly pay SMMCI’s bank loan and improve St. Michael Hospital’s competitiveness. 35

It cited the following considerations which had justified its approval: (1) the Rehabilitation Plan is endorsed by the
Rehabilitation Receiver subject to certain recommendations; (2) the plan ensures preservation of assets and
orderly payment of debts; (3) the plan provides for recovery rates on operating mode as opposed to liquidation
Page 333 of 343
values; (4) it contains details for a business plan which will restore profitability and solvency of petitioner; (5) the
projected cash flow can support the continuous operation of the debtor as a going concern; (6) the plan did not
ask for a waiver of the principal; (7) the plan preserves the security of the secured creditor; (8) the plan has
provisions to ensure that future income will inure to the benefit of the creditors; and (9) the rehabilitation of the
debtor benefits its employees, creditors, stockholders and, in a large sense, the general public as it will generate
employment and is a potential source of revenue for the government. 36

Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval of the Rehabilitation
Plan violated its rights as an unpaid creditor/mortgagee and that the same was submitted without prior
consultation with creditors.37

The CA Ruling

In a Decision38 dated August 30, 2012, the CA affirmed the RTC’s approval of the Rehabilitation Plan. 39

It found that: (a) the rehabilitation of SMMCI is feasible considering the outstanding revenue performance of St.
Michael Hospital, which it shall absorb, showing its gross profit exceeding its operating expenses and the large
probability of increased profitability due to the favorable economic conditions of the locality; ( b) the approval of
the Rehabilitation Plan did not amount to an impairment of contract since there was no directive for the release
of the mortgaged properties to which BPI Family is entitled to as a secured creditor but only a suspension of the
provisions of the loan agreements; (c) it is not mandatory for the validity of the Rehabilitation Plan that the
Rehabilitation Receiver should consult with the creditors; and ( d) the approval of the Rehabilitation Plan was not
made arbitrarily since it was done only after a review of the pleadings filed and the report submitted by the
Rehabilitation Receiver, and its approval was anchored on valid considerations. 40

Dissatisfied, BPI Family moved for reconsideration which was denied in a Resolution 41 dated January 18, 2013,
hence, this petition.

The Issue Before the Court

The essential issue in this case is whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as
approved by the RTC.

The Court’s Ruling

The petition is meritorious.

I.

Restoration is the central idea behind the remedy of corporate rehabilitation. In common parlance, to "restore"
means "to bring back to or put back into a former or original state."42 Case law explains that corporate
rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency, the purpose being to enable the company
to gain a new lease on life and allow its creditors to be paid their claims out of its earnings. 43 Consistent therewith
is the term’s statutory definition under Republic Act No. 10142, 44 otherwise known as the "Financial Rehabilitation
and Insolvency Act of 2010" (FRIA), which provides:

Section 4. Definition of Terms. – As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if
it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if the debtor continues as a going concern than if it is
immediately liquidated.
Page 334 of 343
x x x x (Emphasis supplied)

In other words, rehabilitation assumes that the corporation has been operational but for some reasons like
economic crisis or mismanagement had become distressed or insolvent, i.e., that it is generally unable to pay its
debts as they fall due in the ordinary course of business or has liability that are greater than its assets. 45 Thus, the
basic issues in rehabilitation proceedings concern the viability and desirability of continuing the business
operations of the distressed corporation, 46 all with a view of effectively restoring it to a state of solvency or to its
former healthy financial condition through the adoption of a rehabilitation plan.

In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a position of successful
operation and solvency at the time the Rehabilitation Petition was filed on August 11, 2010. While it had indeed
"commenced business" through the preparatory act of opening a credit line with BPI Family to finance the
construction of a new hospital building for its future operations, SMMCI itself admits that it has not formally
operated nor earned any income since its incorporation. This simply means that there exists no viable business
concern to be restored. Perforce, the remedy of corporate rehabilitation is improper, thus rendering the
dispositions of the courts a quoinfirm.

II.

In fact, for the same reasons, the Court observes that SMMCI could not have even complied with the form and
substance of a proper rehabilitation petition, and submit its accompanying documents, among others, the
required financial statements of a going concern. Section 2, Rule 4 of the 2008 Rules of Procedure on Corporate
Rehabilitation47 (Rules), which were in force at the time SMMCI’s rehabilitation petition was filed on August 11,
2010, pertinently provides:

SEC. 2. Contents of Petition. -

xxxx

(b)The petition shall be accompanied by the following documents:

(1)An audited financial statement of the debtor at the end of its last fiscal year;

(2)Interim financial statements as of the end of the month prior to the filing of the petition;

xxxx

Note that this defect is not negated by the submission of the financial documents pertaining to St. Michael
Hospital, which is a separate and distinct entity from SMMCI. While the CA gave considerable weight to St.
Michael Hospital’s supposed "profitability," as explicated in its own financial statements, as well as the feasibility
study conducted by Mrs. Alibangbang, 48 in affirming the RTC, it has unwittingly lost sight of the essential fact that
SMMCI stands as the sole petitioning debtor in this case; as such, its rehabilitation should have been primarily
examined from the lens of its own financial history. While SMMCI claims that it would absorb St. Michael
Hospital’s operations, there was dearth of evidence to show that a merger was already agreed upon between
them. Accordingly, St. Michael Hospital’s financials cannot be utilized as basis to determine the feasibility of
SMMCI’s rehabilitation.

Note further that while it appears that Sps. Rodil effectively owned and exercised control over the two entities,
such fact does not, by and of itself, warrant their singular treatment for to do so would only confuse the objective
of the proceedings which is to ascertain whether the petitioning corporation, and not any other entity related
thereto (except if joining as a co-petitioning debtor), may be rehabilitated. Neither is the proceeding the proper
forum to pierce the corporate fictions of both entities for it involves no creditor claiming to be a victim of fraud,
an essential requisite for the application of such doctrine. 49

In fine, the petition should not have been given due course, nor should a Stay Order have been issued. 1âwphi1
Page 335 of 343
III.

To compound its error, the CA even disregarded the fact that SMMCI’s Rehabilitation Plan, an indispensable
requisite in corporate rehabilitation proceedings, failed to comply with the fundamental requisites outlined in
Section 18, Rule 3 of the Rules, particularly, that of a material financial commitment to support the rehabilitation
and an accompanying liquidation analysis, all of the petitioning debtor:

SEC. 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business targets or goals and the
duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include
the manner of its implementation, giving due regard to the interests of secured creditors such as, but not limited,
to the non- impairment of their security liens or interests; (c) the material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity
conversion, restructuring of the debts, dacion en pago or sale exchange or any disposition of assets or of the
interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the
present value of payments it would receive under the plan is more than that which it would receive if the assets of
the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and
(f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility
of the rehabilitation plan. (Emphases supplied)

A. Lack of Material Financial Commitment

to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve, determination, earnestness and
good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment may
include the voluntary undertakings of the stockholders or the would- be investors of the debtor-corporation
indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued
successful operation of the debtor corporation during the period of rehabilitation.50

In this case, aside from the harped on merger of St. Michael Hospital with SMMCI, the only proposed source of
revenue the Rehabilitation Plan suggests is the capital which would come from SMMCI’s potential investors,
which negotiations are merely pending. Evidently, both propositions commonly border on the speculative and,
hence, hardly fit the description of a material financial commitment which would inspire confidence that the
rehabilitation would turn out to be successful. In fact, the Rehabilitation Receiver himself recognizes the
ambiguity of the proposition when he recommended that:

[T]he petitioner should provide for details on its statements regarding the prospective investors. If true or in case
it happens, then this fresh capital should be used partly to pay the bank and the rest, to improve the hospital to
make it more competitive with the nearby medical service providers. 51

In the same manner, the fact that St. Michael Hospital had previously made payments for the benefit of SMMCI is
not enough assurance that the arrangement would prospectively apply in the event that rehabilitation is granted.
As case law intimates, nothing short of legally binding investment commitment/s from third parties is required to
qualify as a material financial commitment. 52 However, no such binding investment was presented in this case.

B. Lack of Liquidation Analysis.

SMMCI likewise failed to include any liquidation analysis in its Rehabilitation Plan. The Court observes that as of
November 16, 2009, or about 9 months prior to the filing of the petition for rehabilitation, the loan with BPI
Family had already amounted to 52,784,589.34, with interest at 10.25% p.a. or a daily interest of about 6,655.48
and late payment charge of 36% p.a. 53 However, with no SMMCI financial statement on record, it is unclear to the
Court what assets it possesses in order to determine the values to be derived if liquidation has to be had thereby.
Accordingly, this prevents the Court from ascertaining if the petitioning debtor’s creditors can recover by way of
the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is
immediately liquidated, a crucial factor in a corporate rehabilitation case. Again, the financial records of St.
Michael Hospital, being a separate and distinct entity whose merger with SMMCI only exists in the realm of
Page 336 of 343
probability, cannot be taken as a substitute to fulfill the requirement. What remains pertinent are the financial
statements of SMMCI for it solely stands as the debtor to be rehabilitated, or liquidated in this case.

At any rate, records disclose that St. Michael Hospital’s current cash operating position 54 is just enough to meet
its own maturing obligations.55 While it has substantial total assets, a large portion thereof is comprised of fixed
assets, while its current assets56 consist mostly of inventory.57 Still, the total liquidation assets and the estimated
liquidation return to the creditors, as well as the fair market value vis-à-vis the forced liquidation value of the
fixed assets that would guide the Court in assessing the feasibility of the Rehabilitation Plan were not shown.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to support rehabilitation, as well
as to include a liquidation analysis, translates to the conclusion that the RTC’s stated considerations for
approval, i.e., that (a) the plan provides for recovery rates on operating mode as opposed to liquidation values;
(b) it contains details for a business plan which will restore profitability and solvency on petitioner; ( c) the
projected cash flow can support the continuous operation of the debtor as a going concern; and ( d) the plan has
provisions to ensure that future income will inure to the benefit of the creditors, 58 are actually unsubstantiated,
and hence, insufficient to decree SMMCI’s rehabilitation. It is well to emphasize that the remedy of rehabilitation
should be denied to corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is
rendered obvious by: (a) the absence of a sound and workable business plan; ( b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the execution of
the business plan.59 Unfortunately, these negative indicators have all surfaced to the fore, much to SMMCI’s
chagrin.

IV.

While the Court recognizes the financial predicaments of upstart corporations under the prevailing economic
climate, it must nonetheless remain forthright in limiting the remedy of rehabilitation only to meritorious cases. As
above-mentioned, the purpose of rehabilitation proceedings is not only to enable the company to gain a new
lease on life but also to allow creditors to be paid their claims from its earnings, when so rehabilitated. Hence, the
remedy must be accorded only after a judicious regard of all stakeholders’ interests; it is not a one-sided tool that
may be graciously invoked to escape every position of distress.

In this case, not only has the petitioning debtor failed to show that it has formally began its operations which
would warrant restoration, but also it has failed to show compliance with the key requirements under the Rules,
the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the reasons hereinabove
explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation
Petition. With this pronouncement, it is now unnecessary to delve on the other ancillary issues raised herein.

WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2012 and the Resolution dated January 18,
2013 of the Court of Appeals in CA-G.R. SP No. 121004 upholding the Order dated August 4, 2011 of the Regional
Trial Court of Imus, Cavite, Branch 21 approving the Rehabilitation Plan of respondent St. Michael Medical Center,
Inc. (SMMCI) are hereby REVERSED and SET ASIDE. Accordingly, SMMCI’s Petition for Corporate Rehabilitation
is DISMISSED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

G.R. No. 183587 April 20, 2015

Page 337 of 343

LEXBER, INC., Petitioner,
vs.
CAESAR M. and CONCHITA B. DALMAN, Respondents.

DECISION

BRION, J.:

We resolve in this petition for review on certiorari 1 the challenge to the April 14, 2008 decision 2 and the June 30,
2008 resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 100946. These assailed CA rulings annulled the
June 12, 20074 and August 8, 20075 orders of the Regional Trial Court of Quezon City, Branch 90 (trial court),
which gave due course to the September 28, 2006 petition for rehabilitation 6 of petitioner Lexber, Inc. (Lexber).
Factual Antecedents

Lexber is a domestic corporation engaged in the business of housing, construction, and real estate development.
Its housing projects are mostly located in the province of Benguet, Baguio City, and Cabanatuan City. 7

Among those who availed of Lexber’s housing projects are respondent-spouses Caesar and Conchita Dalman
(Spouses Dalman), who bought a house and lot under a contract to sell in Lexber’s Regal Lexber Homes at Tuba,
Benguet.8

Because of the 1997 Asian financial crisis and other external factors, Lexber’s financial condition deteriorated. It
was forced to discontinue some of its housing projects, 9 including the one where the Spouses Dalman’s
purchased property is located.

As Lexber could no longer pay its creditors, it filed a petition for rehabilitation with prayer for the suspension of
payments on its loan obligations.10 Among its creditors are the Spouses Dalman who are yet to receive their
purchased house and lot, or, in the alternative, a refund of their payments which amounted to ₱900,000.00.11

In an order dated June 12, 2007, the trial court gave due course to Lexber’s rehabilitation petition and appointed
Atty. Rafael Chris F. Teston (Atty. Teston) as rehabilitation receiver. It further ordered Atty. Teston to evaluate
Lexber’s rehabilitation plan and recommend the necessary actions to be taken. 12

The Spouses Dalman filed a motion for reconsideration13 from this order and argued that consistent with Rule 4,
Section 1114 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules), the trial court should
have dismissed outright the rehabilitation petition because it failed to approve the rehabilitation plan within 180
days from the date of the initial hearing.

The Spouses Dalman further submitted that no rehabilitation petition of a real estate company like Lexber should
be given due course without the Housing and Land Use Regulatory Board’s (HLURB) prior request for the
appointment of the rehabilitation receiver.

On August 8, 2007, the trial court denied Spouses Dalman’s motion for reconsideration, prompting the Spouses
Dalman to seek relief from the CA through a Rule 65 petition. 15

The CA’s Ruling

The CA granted the petition for certiorari.

The CA ruled that the trial court should have dismissed Lexber’s rehabilitation petition outright as there was no
evidence to show that the HLURB requested the appointment of Lexber’s rehabilitation receiver. 16 The CA posited
that under Section 6(c)17 of Presidential Decree (PD) 902-A, as amended,18 it is only after the HLURB’s request that
a rehabilitation court can give due course to a rehabilitation petition and validly appoint a receiver.19

Page 338 of 343

Lastly, the CA held that the rehabilitation petition must also be dismissed since the rehabilitation plan was not
approved within the prescribed 180-day period under Rule 4,Section 11 of the Interim Rules.

The Petition

Lexber disclosed in its petition that in an order dated May 23, 2008, the trial court eventually dismissed the
rehabilitation petition because of the disapproval of Lexber’s proposed rehabilitation plan. The CA is currently
reviewing this subsequent order in a separate proceeding, docketed as CA G.R. No. 103917. 20

Notwithstanding this supervening dismissal, Lexber argues that the CA erred in reversing the trial court’s initial
finding of merit in the rehabilitation petition.

Lexber submits that nowhere in Section 6(c) of PD 902-A, as amended, is it provided that the HLURB’s prior
request for the appointment of a receiver is mandatory before the rehabilitation court can give due course to the
petition for rehabilitation of a real estate company. 21

Finally, Lexber contends that the outright dismissal of a rehabilitation petition for non-compliance with the 180-
day period for the approval of the rehabilitation plan is against the Interim Rules’ policy of liberal construction to
facilitate the rehabilitation of distressed corporations.22

The Issues

The main issue before us is whether the CA erred in finding grave abuse of discretion on the trial court’s part
when it gave due course to the rehabilitation petition, despite:

a. the absence of the HLURB’s prior request for the appointment of a rehabilitation receiver; and b. the lapse of
the 180-day period for the approval of a rehabilitation plan.

The Court’s Ruling

We resolve to DENY the petition due to the pendency of CA G.R. No. 103917, pending with the CA after the trial
court dismissed Lexber’s rehabilitation petition in its May 23, 2008 order. Because of this supervening event, the
Court is also compelled to deny the present petition. We so rule to avoid any conflicting ruling with the CA’s
decision in CA G.R. No. 103917, which is reviewing the rehabilitation petition’s dismissal but for a different and
more substantive reason, i.e., the disapproval of Lexber’s rehabilitation plan.

This possibility of rendering conflicting decisions among reviewing courts is one of the reasons why the Rules of
Procedure on Corporate Rehabilitation 23 (2008 Rules) amended the Interim Rules’ provision on the available
procedural remedies after the filing of the rehabilitation petition. This has also been further amended in the new
Financial Rehabilitation Rules of Procedure 24 (2013 Rules).

Under the Interim Rules, a motion for reconsideration is a prohibited pleading. 25 This is no longer true under the
2008 Rules and the new 2013 Rules, which implemented the procedural changes outlined below:

2008 Rules 2013 Rules

Rule 8 Rule 6
Procedural Remedies Procedural Remedies

Section 1. Motion for Reconsideration.- A party Section 1. Motion for Reconsideration – A party
may file a motion for reconsideration of any order may file a motion for reconsideration of any order
issued by the court prior to the approval of the issued by the court prior to the approval of the
rehabilitation plan. No relief can be extended to rehabilitation plan. No relief can be extended to
the party aggrieved by the court's order on the the party aggrieved by the court’s order on the
motion through a special civil action for certiorari motion through a special civil action for certiorari
Page 339 of 343
 under Rule 65 of the Rules of Court. Such order
can only be elevated to the Court of Appeals as an
assigned error in the petition for review of the
decision or order approving or disapproving the
rehabilitation plan. An order issued after the
approval of the rehabilitation plan can be
reviewed only through a special civil action for
certiorari under Rule 65 of the Rules of Court.
Section 2. Review of Decision or Order on
Rehabilitation Plan. - An order approving or
disapproving a rehabilitation plan can only be
reviewed through a petition for review to the
Court of Appeals under Rule 43 of the Rules of
Court within fifteen (15) days from notice of the
decision or order. [Emphasis supplied.]
under Rule 65 of the Rules of Court.
An order issued after the approval of the
rehabilitation plan can be reviewed only through a
special civil action for certiorari under Rule 65 of
the Rules of Court.
Section 2. Review of Decision or Order on
Rehabilitation Plan.- An order approving or
disapproving a rehabilitation plan can only be
reviewed through a petition for certiorari to the
Court of Appeals under Rule 65 of the Rules of
Court within fifteen (15) days from notice of the
decision or order. [Emphasis supplied.]

Hence, under the 2008 Rules, an appeal (through a Rule 43 petition) may be filed only after the trial court issues
an order approving or disapproving the rehabilitation plan. Any issue arising from a denied motion for
reconsideration may only be raised as an assigned error in the Rule 43 petition and may not be questioned in a
separate Rule 65 petition. The exception to this is when the issue only arose after the issuance of the order
denying or approving the rehabilitation plan.

This procedural guideline had been further amended in the 2013 Rules where any relief from the trial court’s
denial of a motion for reconsideration is no longer available. Moreover, the CA’s mode of review is now through
Rule 65 and not Rule 43. But despite this further change, the 2013 Rules retained the guideline in the 2008 Rules
that review may be sought from the CA only after the rehabilitation court issues an order approving or
disapproving the rehabilitation plan. Thus, if after the filing of the rehabilitation petition the trial court is satisfied
that the jurisdictional requirements were complied with, the initial hearing shall commence and the petition for
rehabilitation shall be given due course. 26 At this stage, no appeal or certiorari petition may yet be filed as any
remedy is only available after the order approving or disapproving the rehabilitation plan. This is to avoid the
present situation where there are multiple petitions filed with the appellate courts from which conflicting
decisions may be rendered.

But since these procedural rules were not yet in place when the facts of this case occurred, the Court’s remedy is
to deny the present petition in order to avoid pre-empting the proceedings in CA G.R. No. 103917.

Despite this denial, the Court still deems it appropriate to resolve the substantive issues which Lexber raised vis-à-
vis the Interim Rules. This is to correct any erroneous legal reasoning which the CA committed, and uphold
controlling legal principles for the benefit of the bench, the bar and the public.

The HLURB’s prior request for the appointment of a rehabilitation receiver is not a condition precedent before the
trial court can give due course to a rehabilitation petition.

To support its argument that the HLURB’s prior request is a condition precedent that must be complied with
before the trial court can give due course to a rehabilitation petition of a real estate company like Lexber, the CA
invoked Section 6(c) of PD-902-A as basis. The pertinent part of this provision states:

[T]he [SEC] may appoint a rehabilitation receiver of corporations, partnerships or other associations supervised or
regulated by other government agencies, such as banks and insurance companies, upon request of the
government agency concerned. [Emphasis supplied.] Notably, the Securities and Exchange Commission’s (SEC’s)
jurisdiction over rehabilitation cases had already been transferred to the regional trial courts acting as commercial
courts by virtue of Republic Act (RA) 8799 27 or the Securities Regulation Code.28 The CA argues that despite this
jurisdictional transfer, the substantive provisions of PD 902-A, particularly those powers which the SEC may
exercise in rehabilitation cases, remain.

Page 340 of 343

The CA is correct in this line of reasoning. However it erred in interpreting Section 6(c) to mean that no
rehabilitation petition of a corporation that the HLURB regulates, can be heard unless a prior request of this
agency for the appointment of a rehabilitation receiver was made.

The CA explains that its reasoning is consistent with the rule that if there is a particular agency regulating a
business, e.g., the Bangko Sentral ng Pilipinas (BSP) over banks, and the Insurance Commission (IC) over
insurance companies, no rehabilitation petition can be initiated without their request for the appointment of a
receiver.

The error in this generalization is its failure to identify the distinction between the enumerated examples in
Section 6(c), i.e., banks and insurance companies, and Lexber, a construction and real estate company.

Under Section 3029 of RA 7653,30 which had been retained under Section 69 31 of RA 8971,32 the designation of a
conservator or the appointment of a receiver for the rehabilitation of banks and quasi-banks, is vested exclusively
with the Monetary Board. On the other hand, PD 612 33 specifically mandates the IC to designate the receiver of
an insurance company in case of its insolvency or rehabilitation. 34

Clearly, the respective charters of the BSP and the IC specifically authorize them to appoint a receiver in case a
company under their regulation is undergoing corporate rehabilitation. Notably, this is not the case with the
HLURB. Its enabling law does not grant it this particular power. 1âwphi1 Section 535 of Executive Order 64836 of the
HLURB’s charter, enumerates the powers that the HLURB is authorized to exercise.

Section 8 of the same law also provides the functions which had been transferred from the National Housing
Authority to the HLURB, viz:

1. Regulation of the real estate trade and business;

2. Registration of subdivision lots and condominium projects;

3. Issuance of license to sell subdivision lots and condominium units in the registered units;

4. Approval of performance bond and the suspension of license to sell;

5. Registration of dealers, brokers and salesman engaged in the business of selling subdivision lots or
condominium units;

6. Revocation of registration of dealers, brokers and salesmen;

7. Approval or mortgage on any subdivision lot or condominium unit made by the owner of developer;

8. Granting of permits for the alteration of plans and the extension of period for completion of
subdivision or condominium projects;

9. Approval of the conversion to other purposes of roads and open spaces found within the project
which have been donated to the city or municipality concerned;

10. Regulation of the relationship between lessors and lessees; and

11. Hear and decide cases on unsound real estate business practices; claims involving refund filed against
project owners, developers, dealers, brokers or salesmen and cases of specific performance.

An examination of these functions confirms that in sharp contrast to the BSP and the IC, nowhere in the HLURB’s
charter is it expressly or impliedly granted the power to appoint the rehabilitation receivers of financially
distressed corporations under its supervision and regulation. An administrative agency’s powers are limited to

Page 341 of 343

those expressly conferred on it or granted by necessary or fair implication in its enabling act. 37 In our
constitutional framework, which mandates a limited government, its branches and administrative agencies
exercise only those powers delegated to them as "defined either in the Constitution or in legislation, or in
both."38 Notably, the powers granted to the HLURB are focused on its regulation of real estate companies to
ensure that the investing public is protected from fraudulent real estate practices. These powers do not touch
upon the HLURB’s authority to intervene in the general corporate acts, e.g. the rehabilitation, of those under its
supervision.

While it may be argued that the HLURB should be informed of the financial rehabilitation of a real estate
company, to enable it to intelligently and meaningfully exercise its functions, the law is clear that the HLURB’s
prior request for the appointment of a receiver of real estate companies, is not a condition sine qua non before
the trial court can give due course to their rehabilitation petition.

The lapse of the 180-day period for the approval of the rehabilitation plan should not automatically result to the
dismissal of the rehabilitation petition.

In ruling for the outright dismissal of Lexber’s rehabilitation petition, the CA noted that the trial court failed to
approve Lexber’s rehabilitation plan within 180 days from the date of the initial hearing, thus prompting the
application of Rule 4, Section 11 of the Interim Rules, to wit: Section 11. Period of the Stay Order- The stay order
shall be effective from the date of its issuance until the dismissal of the petition or the termination of the
rehabilitation proceedings. The petition shall be dismissed if no rehabilitation plan is approved by the court upon
the lapse of one hundred eighty (180) days from the date of the initial hearing. The court may grant an extension
beyond this period only if it appears by convincing and compelling evidence that the debtor may successfully be
rehabilitated. In no instance, however, shall the period for approving or disapproving a rehabilitation plan exceed
eighteen (18) months from the date of filing of the petition. [Emphasis supplied.]

The CA explained that the word "shall" is a word of command. Thus, the essential effect of the non-approval of
the rehabilitation plan after 180 days from the initial hearing is the dismissal of the rehabilitation petition.

However, while the general rule in statutory construction is that the words "shall," "must," "ought," or "should" are
of mandatory character in common parlance, it is also well-recognized in law and equity that this is not an
absolute rule or inflexible criterion.39

The records of the present case show that on May 4, 2007, Lexber filed a motion for the extension of the period
for the approval of the rehabilitation plan. However, the trial court never issued a resolution on this motion.
Instead, on June 12, 2007, it issued an order giving due course to the petition. 1âwphi1 The records also reveal that
after the initial hearing, the trial court had to conduct additional hearings even after the lapse of the 180-day
period.

Under these circumstances, the Court concludes that Lexber could not be faulted for the non-approval of the
rehabilitation plan within the 180-day period. A petitioner-corporation should not be penalized if the trial court
needed more time to evaluate the rehabilitation plan. Notably, in the present case, Lexber filed a motion for the
extension of the 180-day period. However, the trial court did not issue a resolution on this motion. Instead, it
issued an order giving due course to the petition, which also fell within the 18-month limit prescribed under the
law.

Rule 2, Section 2 of the Interim Rules dictates the courts to liberally construe the rehabilitation rules in order to
carry out the objectives of Sections 6(c) of PD 902-A, as amended, and to assist the parties in obtaining a just,
expeditious, and inexpensive determination of rehabilitation cases. The trial court’s decision to approve or
disapprove a rehabilitation plan is not a ministerial function and would require its extensive study and analysis. As
it turned out, after careful scrutiny of the rehabilitation petition, and its annexes, the trial court eventually
disapproved Lexber’s rehabilitation plan and dismissed the rehabilitation petition.

WHEREFORE, premises considered, we hereby DENY the present petition in view of the pendency of CA G.R. No.
103917. No costs.
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SO ORDERED.

ARTURO D. BRION
Associate Justice

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