CORPORATION FULL TEXT

BATCH
Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 149252. April 28, 2005
DONALD KWOK, Petitioners,
vs.
PHILIPPINE CARPET MANUFACTURING CORPORATION, Respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 60232
dismissing Donald Kwoks petition for review on certiorari and affirming the majority Decision of the
National Labor Relations Commission (NLRC), as well as its resolution in NLRC NCR Case No. 0012-07454-96 dismissing the motion for reconsideration of the said decision.
The Antecedents
In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim, along with some other
stockholders, established a corporation, the respondent Philippine Carpet Manufacturing
Corporation (PCMC). The petitioner became its general manager, executive vice-president and chief
operations officer. Lim, on the other hand, was its president and chairman of the board of directors.
When the petitioner retired 36 years later or on October 31, 1996, he was receiving a monthly salary
of P160,000.00.2 He demanded the cash equivalent of what he believed to be his accumulated
vacation and sick leave credits during the entire length of his service with the respondent
corporation, i.e., from November 16, 1965 to October 31, 1996, in the total amount of P7,080,546.00
plus interest.3 However, the respondent corporation refused to accede to the petitioners demands,
claiming that the latter was not entitled thereto.4
The petitioner filed a complaint against the respondent corporation for the payment of his
accumulated vacation and sick leave credits before the NLRC. He claimed that Lim made a verbal
promise to give him unlimited sick leave and vacation leave benefits and its cash conversion upon
his retirement or resignation without the need for any application therefor. In addition, Lim also
promised to grant him other benefits, such as golf and country club membership; the privilege to
charge the respondent corporations account; 6% profit-sharing in the net income of the respondent
corporation (while Lim got 4%); and other corporate perquisites. According to the petitioner, all of
these promises were complied with, except for the grant of the cash equivalent of his accumulated
vacation and sick leave credits upon his retirement.5

The respondent corporation denied all these, claiming that upon the petitioners retirement, he
received the amount of P6,902,387.19 representing all the benefits due him. Despite this, the
petitioner again demandedP7,080,546.00, which demand was without factual and legal basis. The
respondent corporation asserted that the chairman of its board of directors and its president/vicepresident had unlimited discretion in the use of their time, and had never been required to file
applications for vacation and sick leaves; as such, the said officers were not entitled to vacation and
sick leave benefits. The respondent corporation, likewise, pointed out that even if the petitioner was
entitled to the said additional benefits, his claim had already prescribed. It further averred that it had
no policy to grant vacation and sick leave credits to the petitioner.6
In his Affidavit7 dated May 19, 1998, Lim denied making any such verbal promise to his son-in-law on
the grant of unlimited vacation and sick leave credits and the cash conversion thereof. Lim averred
that the petitioner had received vacation and sick leave benefits from 1994 to 1996. Moreover,
assuming that he did make such promise to the petitioner, the same had not been confirmed or
approved via resolution of the respondent corporations board of directors.
It was further pointed out that as per the Memorandum dated November 6, 1981, only regular
employees and managerial and confidential employees falling under Category I were entitled to
vacation and sick leave credits. The petitioner, whose position did not fall under Category I, was,
thus, not entitled to the benefits under the said memorandum. The respondent corporation alleged
that this was admitted by the petitioner himself and affirmed by Raoul Rodrigo, its incumbent
executive vice-president and general manager.
In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in favor of the petitioner.
The fallo of the decision reads:
WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered ordering
the respondent company to pay complainant the sum of P7,080,546.00, plus ten percent (10%)
thereof as and for attorneys fees.
SO ORDERED.9
Undaunted, the respondent corporation appealed the decision to the NLRC, alleging that:
I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED BY THE
NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE CREDITS. 10
II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS DISCRIMINATORY NOT TO
GRANT KWOK THESE BENEFITS.11
III. KWOKS CLAIMS ARE BASELESS.12
IV. KWOKS CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY
PRESCRIPTION.13
V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14

The respondent corporation averred that based on the petitioners memorandum, his admissions
and the contract of employment, the petitioner was not entitled to the cash conversion of his sick and
vacation leave credits. While the respondent corporation conceded that the petitioner may have
been entitled to unlimited sick and vacation leave benefits during his employment, it maintained that
no such promise was made by Lim to convert the same; even assuming that such verbal promise
was made, the respondent corporation was not bound thereby since the petitioner failed to adduce
the written conformity of its board of directors. The respondent corporation insisted that the claims of
the petitioner were barred under Article 291 of the Labor Code.
For his part, the petitioner made the following averments in his memorandum:
The non-performance by PCMC of this particular promise to convert in cash all of his unused cash
(sic) and sick leave credits was precipitated by the falling out of the marriage between Mr. Kwok and
his wife, the daughter of Mr. Lim. In fact, even while Mr. Kwok was still the Executive Vice-President
and General Manager of PCMC, when the falling out of the said marriage became apparent, the
other benefits or perquisites which Mr. Kwok used to enjoy were immediately curtailed by Mr. Lim to
the prejudice of Mr. Kwok.15
On November 29, 1999, the NLRC, by majority vote, rendered judgment granting the appeal,
reversing and setting aside the decision of the Labor Arbiter.16 The NLRC ordered the dismissal of
the complaint. Commissioner Angelita A. Gacutan filed a dissenting opinion. 17
Aggrieved, the petitioner filed a petition for review with the CA, on the following grounds:
I
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
DECLARED THAT THE VERBAL PROMISE OF MR. LIM TO PETITIONER WAS
UNENFORCEABLE.
II
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
RULED THAT THE VERBAL PROMISE BY MR. LIM TO PETITIONER WAS NOT BINDING AS IT
WAS NOT APPROVED BY THE BOARD OF DIRECTORS.
III
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
IGNORED STRONG EVIDENCE THAT PCMC CLOTHED MR. LIM WITH AWESOME POWERS TO
GRANT BENEFITS TO ITS EMPLOYEES INCLUDING PETITIONER AND RATIFIED THE SAME
BY ITS SILENCE AND WHEN IT IGNORED TOO EXISTING JURISPRUDENCE ON THE MATTER.

IV
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
IGNORED STRONG AND CLEAR EVIDENCE THAT IN PCMC THE GIVING OF BENEFITS TO
PETITIONER, THOUGH NOT IN WRITING, WAS A PREVALENT PRACTICE.
V
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
RULED THAT THE MEMORANDUM DATED APRIL 26, 1997 APPLICABLE TO MR. RAOUL
RODRIGO WAS ALSO APPLICABLE TO PETITIONER.18
On February 28, 2001, the CA rendered judgment affirming the decision of the NLRC and dismissing
the petition.19 The petitioners motion for reconsideration thereof was denied by the appellate court,
per its Resolution20 dated July 17, 2001.
The petitioner, thus, filed the instant petition for review on certiorari with this Court, assailing the
decision and resolution of the CA on the following claims:
I
The Hon. Court of Appeals, contrary to law, gravely erred and disregarded established jurisprudence
in ruling that petitioner has not adduced sufficient evidence to support his claim that he was, indeed,
promised the cash conversion of his unused vacation and sick leave credits upon retirement. 21
II
The Hon. Court of Appeals gravely erred in ruling that even if private respondents (sic) Mr. Lim did
make him such promise, the same cannot be enforced. 22
III
The Hon. Court of Appeals gravely erred and disregarded clear jurisprudence on the matter when it
ruled that there is no showing that private respondent, thru its board of directors either recognized,
approved or ratified the promise made by Mr. Lim to petitioner.23
As gleaned from his Memorandum, the petitioner posits that he had adduced substantial evidence to
prove that Lim, as president and chairman of the respondent corporations board of directors, made
a verbal promise to give him the cash conversion of his accumulated vacation and sick leave credits
upon his retirement (that is, benefits at par with the number of days to which the officer next in rank
to him was entitled). According to the petitioner, his claim is fortified by the fact that his successor,
Raoul Rodrigo, has unlimited vacation and sick leave credits. The petitioner further asserts that he
would not have accepted the positions in the respondent corporation without such benefit, especially
since his subordinates were also enjoying the same. He posits that he was entitled to the said

privilege because of his rank. He, likewise, claims that, in contrast to the evidence he has presented,
the respondent corporation failed to adduce proof of its affirmative allegations.
The petitioner further argues that his complaint was not time-barred since he filed it on December 5,
1996. Even if this were so, he is, nevertheless, entitled to the cash value of his vacation and sick
leave credits for three years before his retirement. Moreover, the evidence on record shows that
officers belonging to Category I had been granted the cash conversion of their earned leave credits
after the lapse of three years.
The respondent corporation, for its part, asserts that the petitioner failed to adduce substantial
evidence to the claims in his complaint. Even if Lim had made such verbal promise to the petitioner,
the same is not binding on the respondent corporation absent its conformity through board
resolution. Moreover, the petitioner is not covered by the Memorandum dated November 6, 1981
because he had unlimited leave credits; hence, it cannot be gainsaid that he still had unused leave
credits to be converted. According to the respondent corporation, the petitioner himself admitted that
he was not included in the Memorandum dated November 6, 1981; and even assuming that he was
covered by the said memorandum, the fact that his complaint was filed only in 1996 precludes him
from claiming the cash conversion of such leave credits for the years 1966 to 1993.
The Courts Ruling
The petition has no merit.
ISSUE:
The threshold issue in this case is factual whether or not the petitioner is entitled, based on
the documentary and testimonial evidence on record, to the cash value of his vacation and
sick leave credits in the total amount ofP7,080,546.00. The resolution of the issue is riveted to
our resolution of whether the petitioners mainly testimonial evidence of an alleged verbal promise
made by a corporate officer to grant him the privilege of converting accumulated vacation and sick
leave credits after retirement or separation from employment is entitled to probative weight.
HELD: NO
QUESTIONS OF LAW ONLY NOT QUESTIONS OF FACT
Under Rule 45 of the Rules of Court, only questions of law may be raised under a petition for review
on certiorari. The Court, not being a trier of facts, is not wont to reexamine and reevaluate the
evidence of the parties, whether testimonial or documentary. Moreover, the findings of facts of the
CA on appeal from the NLRC are, more often than not, given conclusive effect by the Court. The
Court may delve into and resolve factual issues only in exceptional circumstances, such as when the
findings of facts of the Labor Arbiter, on one hand, and those of the NLRC and the CA, on the other,
are capricious and arbitrary; or when the CA has reached an erroneous conclusion based on
arbitrary findings of fact; and when substantial justice so requires. In this case, however, the
petitioner failed to convince the Court that the factual findings of the CA which affirmed the findings

of the NLRC on appeal, as well as its conclusions based on the said findings, are capricious and
arbitrary.
While the petitioner was unequivocal in claiming that the respondent corporation, through its
president and chairman of the board of directors, obliged itself, as a matter of policy, to grant him the
cash value of his vacation and sick leave credits upon his retirement, he was burdened to prove his
claim by substantial evidence.24 The petitioner failed to discharge this burden.
We agree with the petitioners contention that for a contract to be binding on the parties thereto, it
need not be in writing unless the law requires that such contract be in some form in order that it may
be valid or enforceable or that it be executed in a certain way, in which case that requirement is
absolute and independent.25 Indeed, corporate policies need not be in writing. Contracts entered into
by a corporate officer or obligations or prestations assumed by such officer for and in behalf of such
corporation are binding on the said corporation only if such officer acted within the scope of his
authority or if such officer exceeded the limits of his authority, the corporation has ratified such
contracts or obligations.
In the present case, the petitioner relied principally on his testimony to prove that Lim made a verbal
promise to give him vacation and sick leave credits, as well as the privilege of converting the same
into cash upon retirement. The Court agrees that those who belong to the upper corporate echelons
would have more privileges. However, the Court cannot presume the existence of such privileges or
benefits. The petitioner was burdened to prove not only the existence of such benefits but also that
he is entitled to the same, especially considering that such privileges are not inherent to the
positions occupied by the petitioner in the respondent corporation, son-in-law of its president or not.
In dismissing the petition before it, the CA disbelieved the petitioners testimony and gave credence
and probative weight to the collective testimonies of the respondent corporations witnesses, who
were its employees and officers, including Lim, whom the petitioner presented as a hostile witness.
We agree with the appellate courts encompassing synthesis and analysis of the evidence on record:
Except for his bare assertions, petitioner has not adduced sufficient evidence to support his claim
that he was, indeed, promised the cash conversion of his unused vacation and sick leaves upon
retirement. Petitioner harps on what he calls the prevalent practice in PCMC of giving him benefits,
such as the use of golf and country club facilities, salary increases, the use of the company vehicle
and driver, and sharing in PCMCs annual net income, without either a written contract or a Board
resolution to back it up. Respondent PCMC denies all these, however. According to respondent,
petitioners share in the income of the company is actually part of the consultancy fee which PCMC
pays DK Management Services, Inc., a firm owned by petitioners company. PCMC adds that the
yearly salary increases of corporate officers were always with the prior approval of the Board.
RULE IN EVIDENCE - that each party must prove his affirmative allegation
Nevertheless, assuming that petitioner was, indeed, given the benefits which he so claimed, it does
not necessarily follow that among those is the cash conversion of his accumulated leaves. It is a
basic rule in evidence that each party must prove his affirmative allegation. Since the burden of proof
lies with the party who asserts an affirmative allegation, the plaintiff or complainant has to prove his

affirmative allegations in the complaint and the defendant or respondent has to prove the affirmative
allegations in his affirmative defenses and counterclaim. Petitioner, in the case at bar, has failed to
discharge this burden.26
The CA made short shift of the claim of the petitioner that per Memorandum dated November 6,
1981, he was not entitled to the benefits of the company policy of commutation of leave credits.
Indeed, the company policy of conversion into equivalent cash of unused vacation and sick leave
credits applied only to its regular employees. The petitioner failed to offer evidence to rebut the
testimony of Nel Gopez, Chief Accountant of the respondent, that the petitioner was not among the
regular employees covered by the policy for the simple reason that he had unlimited vacation leave
benefits. As stated by the CA, the petitioner no less corroborated the testimony of Gopez, thus:
ATTY. PIMENTEL
And, so you mention[ed] earlier that the policy on vacation leave benefits apply for category one
employee(s) and rank-and-file employee(s)?
WITNESS (Mr. Nel Gopez)
Yes.
ATTY. PIMENTEL
And who are considered category one employee(s)?
WITNESS
Category One employees are from the rank and of Senior Vice-President and Assistant General
Manager and below, up to the level of department managers.
ATTY. PIMENTEL
How about the complainant, Mr. Kwok, does he falling (sic) to the category one?
WITNESS
As far as I can remember, he is (sic) not belong to category one employee.
ATTY. PIMENTEL
Therefore, he is not entitled to the lump sum benefit?
WITNESS
Yes, Maam.

ATTY. PIMENTEL
And would you know, Mr. Witness, why he is (sic) not given the conversion of the vacation leave
benefits at the time category one employees sectors (sic) are given?
WITNESS
Because he has, as far as I can remember, he has unlimited vacation leave."
This was corroborated by petitioner himself when he testified in this wise:
ATTY. PIMENTEL
Mr. Witness, you occupied the position of Executive Vice-President and General Manager. You agree
with me that this position or this office of Executive Vice-President and General Manager are not
covered by this policy.
WITNESS (Donald Kwok)
Yes, it is not covered by this policy.

ATTY. PIMENTEL
So this policy applies to persons below you and your father-in-law?
WITNESS
Yes, right.
ATTY. PIMENTEL
And this policy does not apply to you?
WITNESS
As far as Im concerned, it does not apply for (sic) me.
In all respects, therefore, petitioner, by virtue of his position as Executive Vice-President, is not
covered by the November 6, 1981 Memorandum granting PCMC employees the conversion of their
unused vacation and sick leaves into cash.27
We have reviewed the records and found no evidence to controvert the following findings of the CA
and its ratiocinations on its resolution of the petitioners submissions:

ART 291 LABOR CODE:

Second, even assuming that petitioner is included among the "regular employees" of PCMC referred
to in said memorandum, there is no evidence that he complied with the cut-off dates for the filing of
the cash conversion of vacation and sick leaves. This being so, we find merit in respondents
argument that petitioners money claims have already been barred by the three-year prescriptive
period under Article 291 of the Labor Code, as amended.
HE DID NOT FILE:
Third, and this is of primordial importance, there is no proof that petitioner has filed vacation and sick
leaves with PCMCs personnel department. Without a record of petitioners absences, there is no
way to determine the actual number of leave credits he is entitled to. The P7,080,546.00 figure
arrived at by petitioner supposedly representing the cash equivalent of his earned sick and vacation
leaves is thus totally baseless.
THERE MUST BE BOARD RESOLUTION:
And, fourth, even assuming that PCMC President Patricio Lim did promise petitioner the cash
conversion of his leaves, we agree with respondent that this cannot bind the company in the
absence of any Board resolution to that effect. We must stress that the personal act of the company
president cannot bind the corporation. As explicitly stated by the Supreme Court in Peoples Aircargo
and Warehousing Co., Inc. v. Court of Appeals:
"The general rule is that, in the absence of authority from the board of directors, no person, not even
its officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct
from its stockholders and members, having xxx powers, attributes and properties expressly
authorized by law or incident to its existence.
" the power and the responsibility to decide whether the corporation should enter into a contract
that will bind the corporation is lodged in the board, subject to the articles of incorporation, by-laws,
or relevant provisions of law."
POWER OF PRESIDENT
Anent the third assigned error, petitioner maintains that the PCMC Board of Directors has granted its
President, Patricio Lim, awesome powers to grant benefits to its employees, adding that the Board
has always given its consent to the way Lim ran the affairs of the company especially on matters
relating to the benefits that its corporate officers enjoyed.
True, jurisprudence holds that the president of a corporation possesses the power to enter
into a contract for the corporation when "the conduct on the part of both the president and
corporation [shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized, approved
and ratified his former and similar actions."

In the case at bar, however, there is no showing that PCMC had either recognized, approved or
ratified the cash conversion of petitioners leave credits as purportedly promised to him by Lim. On
the contrary, PCMC has steadfastly maintained that "the Company, through the Board, has long
adopted the policy of granting its earlier mentioned corporate officers unlimited leave benefits
denying them the privilege of converting their unused vacation or sick leave benefits into their cash
equivalent."
RAUL RODRIGO:
As to the last assigned error, petitioner faults the NLRC for holding as applicable to petitioner, the
April 26, 1997 Memorandum issued by PCMC to Raoul Rodrigo, Donald Kwoks successor as
company executive vice-president. The said memo granted Rodrigo unlimited sick and vacation
leave credits but disallowed the cash conversion thereof. Before he became executive vicepresident, Rodrigo was senior vice-president and enjoyed the commutation of his unused vacation
and sick leaves.
We note that the April 26, 1997 memo was issued to Rodrigo when petitioner was already retired
from PCMC. While said memorandum was particularly directed to Rodrigo, however, this does not
necessarily mean that petitioner, as former executive vice-president, was then not prohibited from
converting his earned vacation and sick leaves into cash since he was not issued a similar memo.
On the contrary, the memo simply affirms the long-standing company practice of excluding PCMCs
top two positions, that of president and executive vice-president, from the commutation of leaves. As
heretofore discussed, among the perks of those occupying these posts is the privilege of having
unlimited leaves, which is totally incompatible with the concept of converting unused leave credits
into their cash equivalents.28
ESTRANGEMENT OF WIFE
We are not convinced by the petitioners claim that Lim capriciously deprived him of his entitlement
to the cash conversion of his accumulated vacation and sick leave credits simply because of his
estrangement from his wife, who happens to be Lims daughter. The petitioner did not adduce any
evidence to show that he appealed to the respondent corporations board of directors for the
implementation of the said privilege which was allegedly granted to him. Even if Lim was the
president and chairman of the respondent corporations board of directors, the rest of the
membership of the board could have overruled him and granted to the petitioner his claim if, indeed,
the latter was entitled thereto. Indeed, even the petitioner admitted that, after his retirement, the
board of directors granted to him salary increase for two years prior to his retirement. If the claim of
the petitioner had been approved by the board of directors, for sure, it would have approved the
same despite his falling out with the daughter of Lim.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the
petitioner.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 150350 August 22, 2006
KOJI YASUMA, Petitioner,
vs.
HEIRS OF CECILIO S. DE VILLA and EAST CORDILLERA MINING
CORPORATION, Respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated October
18, 2001 in CA-G.R. CV No. 61755.
The antecedent facts follow.
On September 15, 1988, October 21, 1988 and December 5, 1988, Cecilio S. de Villa obtained loans
from petitioner Koji Yasuma in the amounts of P1,100,000, P100,000 and P100,000, respectively, for
the total amount of P1.3 million. These loans were evidenced by three promissory notes signed by
de Villa as borrower. The last promissory note in the amount of P1,300,000 cancelled the first two
notes.
The loans were initially secured by three separate real estate mortgages on a parcel of land with
Transfer Certificate of Title No. 176575 in the name of respondent East Cordillera Mining
Corporation. The deeds of mortgage were executed on the dates the loans were obtained, signed by
de Villa as president of respondent corporation. The third real estate mortgage later cancelled the
first two.3
For failure of de Villa to pay, petitioner filed a collection suit in the Regional Trial Court of Makati City,
Branch 148 (RTC-Br. 148) against de Villa and respondent corporation.4 The RTC-Br. 148 declared
de Villa and respondent corporation in default and resolved the case in favor of petitioner. On
appeal, however, the judgment of RTC-Br. 148 was annulled on the ground of improper service of
summons.5 Thus, the case was remanded for retrial.
During the pendency of the case in the RTC-Br. 148, de Villa died. Petitioner consequently amended
the complaint and impleaded the heirs of de Villa as defendants.6
After the case was re-heard, the RTC of Makati City, Branch 139 (RTC-Br. 139) rendered judgment
on November 13, 1998 in favor of petitioner and against respondent corporation. It ordered

respondent corporation to pay petitioner P1.3 million plus legal interest, attorneys fees, liquidated
damages and costs of suit. The complaint was dismissed against respondent heirs. 7
On appeal, the CA reversed and set aside the decision of RTC-Br. 139. It held that the loan was
personal to de Villa and that the mortgage was null and void for lack of authority from the
corporation.
Petitioner is now before this Court with the following assignment of errors:
1. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND REVERSIBLE ERROR OF
LAW WHEN IT DECLARED THAT THE CORPORATION DID NOT RATIFY THE ACT OF ITS
PRESIDENT IN OBTAINING LOANS FROM PETITIONER DESPITE ITS ADMISSION THAT IT
RECEIVED THE MONEY OF THE PETITIONER.
2. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND REVERSIBLE ERROR OF
LAW WHEN IT TOTALLY DISREGARDED THE ADMITTED FACTS AND ISSUES AGREED UPON
BY THE PARTIES AND APPROVED BY THE TRIAL COURT DURING THE PRE-TRIAL.
3. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND REVERSIBLE ERROR OF
LAW WHEN IT SET ASIDE THE REAL ESTATE MORTGAGE AND THE AWARD OF ATTORNEYS
FEES, 10% LIQUIDATED DAMAGES AND THE COSTS OF SUIT.
4. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND REVERSIBLE ERROR OF
LAW WHEN IT SET ASIDE THE AWARD OF INTEREST BY WAY OF DAMAGES IN FAVOR OF
PETITIONER.8
The issues to be resolved are the following:
ISSUES:
1) whether the loans were personal liabilities of de Villa or debts of respondent corporation
and
2) whether the mortgage on respondent corporations property was null and void for having
been executed without its authority.
1) Personal liabilities
2) Mortgage on respondents corporation property is null and void.
We begin with a brief study of some well-settled legal doctrines relevant to the disposition of this
case.
Personal or Corporate Liability?

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

THE POWER TO BORROW MONEY

The power to borrow money is one of those cases where corporate officers as agents of the
corporation need a special power of attorney.16 In the case at bar, no special power of
attorney conferring authority on de Villa was ever presented. The promissory notes
evidencing the loans were signed by de Villa (who was the president of respondent
corporation) as borrower without indicating in what capacity he was signing them. In fact,
there was no mention at all of respondent corporation. On their face, they appeared to be
personal loans of de Villa.

NO RATIFICATION:
Petitioner, however, contends that respondent corporations admission that it received the
total amount of P1.3 million was effectively a ratification of the act of its former president.17 It
appears that, in the pre-trial order dated March 4, 1997 issued by RTC-Br. 139, respondent
corporation indeed admitted the following:
xxx xxx xxx

3. Defendants ADMIT that the total amount of P1.3 Million subject matter of the Promissory
Notes was RECEIVED by the Defendant-Corporation;18 (emphasis supplied)
xxx xxx xxx
In its answer, respondent corporation stated:
7. The sum of money which [petitioner] sought to recover form herein [respondents] is not
really a loan but his investment to the mining project of [respondent] corporation which
unfortunately did not succeed due to the delays caused by typhoons and bad rainy season in the
Benguet mountains causing landslides in the mining and milling site during the latter part of 1988,
and the killer earthquake of 1990 which destroyed the mining area. As investment to a losing
business venture, he is not entitled to claim payment neither could he treat it as a loan. 19
The CA held that this admission was not tantamount to ratification because what respondent
corporation admitted was that the money was in fact received as an investment. It concluded
that:
even if the [respondent corporation] received the money, it cannot be held responsible for not
knowing the preceding transaction between the [p]resident and the [petitioner] as in fact there was a
misrepresentation made to the [respondent corporation], to the effect that the money was an
investment and not a loan. The alleged investment is actually a personal loan of Cecilio de Villa. 20
Petitioners contention has no merit. There was no showing that respondent corporation ever
authorized de Villa to obtain the loans on its behalf. The notes did not show that de Villa
acted on behalf of the corporation. Actually, the corporation would not have figured in the
transaction at all had it not been for its admission that it received the amount of P1.3 million.
As could be gleaned from the promissory notes, it was a stranger to the transaction.
Thus, we conclude that petitioner himself did not consider the corporation to be his debtor for if he
really knew that de Villa was obtaining the loan on behalf of the corporation, then why did he allow
the notes to reflect only the personal liability of de Villa? 21 Even the demand letters of petitioner were
personally addressed to de Villa and not to respondent corporation.22 Undoubtedly, petitioner dealt
with de Villa purely in his personal capacity.
Respondent corporation could not have ratified the act of de Villa because there was no proof that it
knew that he took out a loan on its behalf. As stated earlier, ratification is a voluntary choice that is
knowingly made. The corporation could not have ratified an act it had no knowledge of:
xxx xxx xxx
Ordinarily, the principal must have full knowledge at the time of ratification of all the material
facts and circumstances relating to the unauthorized act of the person who assumed to act
as agent. Thus, if material facts were suppressed or unknown, there can be no valid
ratification . 23

The fact that the corporation admitted receiving the proceeds of the loan did not amount to
ratification of the loan. It accepted the amount from de Villa, its president at that time, in good
faith. Good faith is always presumed.24Petitioner did not show that the corporation acted in
bad faith.
It follows that respondent corporation was not liable for the subsequent loss of the money which it
accepted as an investment. It could not be faulted for not knowing that it was the proceeds of a loan
obtained by de Villa. It was under no obligation to check the source of the investments which went
into its coffers. As long as the investment was used for legitimate corporate purposes, the investor
bore the risk of loss.
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.
Was the Mortgage Valid or Void?
Petitioner insists that the mortgage executed by de Villa, as president of the corporation, was ratified
by the latter since the mortgage was an accessory contract of the loan. 25 We disagree.
A special power of attorney is necessary to create or convey real rights over immovable
property.26 Furthermore, the special power of attorney must appear in a public document. 27 In
the absence of a special power of attorney in favor of de Villa as president of the corporation,
no valid mortgage could have been executed by him.28 Since the mortgage was void, it could
not be ratified.
Petitioner cannot blame anyone but himself. He did not check if the person he was dealing
with had the authority to mortgage the property being offered as collateral.
Given that the loan and mortgage were not binding on respondent corporation, the latter cannot be
held liable for interest, attorneys fees and liquidated damages arising from the loan.
Personal Liability of De Villa
The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after
his death). Petitioner vigorously sought to make respondent corporation liable but exerted no effort
at all to argue for the liability of respondent heirs. The trial court correctly dismissed the case against
the latter. Petitioners remedy now is to file a money claim in the settlement proceedings of de
Villas estate, if not too late, as indicated in
Rule 8629 of the Rules of Court.
WHEREFORE, the petition is hereby DENIED. The October 18, 2001 decision of the Court of
Appeals in CA-G.R. CV No. 61755 is AFFIRMED.
Costs against petitioner.

SO ORDERED.
RENATO C. CORONA
Associate Justice

THIRD DIVISION
[G.R. No. 144661 and 144797. June 15, 2005]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. SPOUSES FRANCISCO ONG and
LETICIA ONG, respondents.
DECISION
GARCIA, J.:
Appealed to this Court by way of a petition for review on certiorari are the Decision[1] dated
March 5, 1999 and Resolution dated July 19, 2000 of the Court of Appeals in CA-G.R. CV No.
54919, affirming in toto an earlier decision of the Regional Trial Court at Cagayan de Oro City,
Branch 23, which ruled in favor of herein respondents, the Spouses Francisco Ong andLeticia
Ong, in a suit for breach of contract and/or specific performance with prayer for writ of preliminary
injunction and damages thereat commenced by them against petitioner Development Bank of the
Philippines (DBP).

Petitioner filed by registered mail a motion for extension time to submit petition, paying the
corresponding docket fees therefor by money order. Upon receipt of the motion, the Court docketed
the case as G.R. No. 144797. Before actual receipt of said motion, however, petitioner personally
filed its petition, which was docketed with a lower number as G.R. No. 144661. What then appears
to be two (2) cases before us are actually just one, now the subject of this decision.
The facts are simple and undisputed:
Petitioners foreclosed asset, formerly owned by one Enrique Abada under TCT No. T-4786 and
located at Corrales Extension, Cagayan de Oro City is the subject of this controversy. On May 25,
1988, respondent Francisco Ong with the conformity of his wife Leticia Ong, addressed a written
offer to petitioner thru its branch manager at Cagayan de Oro City to buy the subject property on a
negotiated sale basis and submitted his best and last offer to purchase[2] under the following terms:
PURCHASE PRICE P136,000.00
DOWNPAYMENT ..
BALANCE

14,000.00

P122,000.00

TERM: C A S H MODE OF PAYMENT: Payable upon ejection of occupants

on the property subject of my
offer.
I/We am/are depositing the amount of P14,000.00 in cash/check to accompany my/our offer, it being
expressly understood, however, that the same does not bind the DBP to the offer until after my/our
receipt of its approval by the higher authorities of the bank. Should the bank receive an offer from a
third-party buyer higher by more than 5% or at more advantageous term accompanied by a deposit
of at least 10% of the offered price, or a higher offer from the former-owner for at least the updated
Total Claim of the Bank accompanied by a minimum deposit of 20% of the purchase price, the Bank
may favorably consider the higher offer and thereafter refund my/our deposit within three (3) working
days after the determination of the most advantageous offer.
The foregoing offer was duly NOTED by petitioners branch head at its Cagayan de Oro City
Branch, Jose Z. Lagrito (Lagrito, for brevity), and Official Receipt No. 3081947 was issued for the
amount of P14,000.00 as respondents deposit.
In a letter dated October 21, 1988 [3], sent to respondents via registered mail, Lagrito informed
the spouses that the bank recently received an offer from another interested third-party-buyer of the
same property at the same price and term, but better and more advantageous to the Bank
considering that the buyer will assume the responsibility at her expense for the ejectment of present
occupants in the said property. Nonetheless, respondents were given in the same letter three (3)
days within which to match the said offer, failing in which the Bank will immediately award the said
property to the other buyer, in which event respondents deposit of P14,000.00 shall be refunded to
them upon surrender of O.R. No. 3081947.

In yet another written offer dated October 28, 1988 [4], respondents matched the said offer of the
second interested buyer by assuming the responsibility at my/our own expense for the ejection of
squatters/occupants, if any, on the property.
On April 7, 1989, there was a conference between respondents, together with their counsel, and
the bank whereat respondents were informed why the sale could not be awarded to them.
Thereafter, in a letter dated September 6, 1990[5], respondents were notified that the property would
instead be offered for public bidding on September 24, 1990 at ten 10:00 oclock in the morning.
Feeling aggrieved by such turn of events, respondents filed with the Regional Trial Court at
Cagayan de Oro City a complaint for breach of contract and/or specific performance against
petitioner. Thereat, the complaint was docketed as Civil Case No. 90-422 which was raffled to
Branch 23 of the court.
After pre-trial, the parties agreed to submit the case for judgment based on the pleadings.
Accordingly, the trial court required them to submit simultaneously their respective memoranda
within thirty (30) days. Only petitioner filed its memorandum.
In a decision[6] dated April 25, 1995, the trial court dismissed the complaint finding that there was
no perfected contract of sale between the parties, hence, there is no breach to speak of since
there was no contract from the very beginning. However, upon respondents motion for
reconsideration, the trial court vacated its judgment and set the case for the reception of evidence.
This time, only the respondents adduced their evidence consisting of the lone testimony of
respondent Francisco Ong and the documents identified by him in the course thereof.
In his testimony, Ong gave the respondents version of what supposedly transpired in their
transaction with petitioner. According to him, he and his wife went to the bank branch at Cabayan de
Oro City and looked for Roy Palasan, a bank clerk thereat and told the latter that they were
interested to buy two (2) lots. Palasan went to talk to Lagrito, the branch manager. Palasan returned
to the spouses and informed them that the branch manager agreed to sell the property to them.
Palasan further told them that they will be required to pay ten (10%) percent of the purchase price as
downpayment, adding that if they were to pay the purchase price in cash, they would be entitled to a
ten (10%) percent discount. After some computations, respondents rounded up the purchase price
at P136,000.00 and pegged the downpayment therefor at P14,000.00. They were then required by
Palasan to sign a bank form supposedly to express their firm offer to purchase the subject property.
But since the form signed by them contains the statement that the approval of higher
authorities of the bank is required to close the deal, respondents queried Palasan about it.
Palasan, however, told them that the documents were only for formality purposes, and further
assured them that the branch manager has already agreed to sell the subject property to them.
Having completed the presentation of their evidence, respondents rested their case. For its part,
petitioner no longer adduced any evidence but merely opted to formally offer its documentary
exhibits. Thereafter, the case was submitted for resolution.
On September 26, 1996, the trial court came out with a new decision,[7] this time rendering
judgment for the respondents, as follows:

WHEREFORE, by reason of preponderance of evidence, the Court hereby finds in favor of the
plaintiffs ( respondents) as against the defendant (petitioners) and hereby orders the defendant:
1. To execute a final sale of the lot subject matter of the contract of sale at the original
agreed price of P136,000.00;
2. Defendant to accept the balance of the purchase price from the plaintiffs;
3. Defendant to pay moral damages in the amount of P30,000.00;
4. Defendant to refund the amount of P10,000.00 actual litigation expenses; and to pay
attorneys fees in the amount of P20,000.00.
SO ORDERED.
Therefrom, petitioner went on appeal to the Court of Appeals in CA-G.R. CV No. 54919, and, on
March 5, 1999, the appellate court rendered the herein assailed decision [8] affirming in totothat of the
trial court, thus:
ACCORDINGLY, the foregoing premises considered, the appealed decision is hereby AFFIRMED in
toto.
SO ORDERED.
With its motion for reconsideration of the same decision having been denied by the Court of
Appeals in its equally challenged resolution of July 19, 2000, [9] petitioner is now with us thru the
present recourse on the following grounds:
A.
THAT THE RESPONDENTS INTRODUCTION OF PAROL EVIDENCE TO PROVE THE ALLEGED
MEETING OF MINDS BETWEEN THE PARTIES WAS NOT SANCTIONED BY RULE 130, SEC. 9,
RULES OF COURT, CONTRARY TO THE FINDINGS OF THE LOWER COURTS, CONSIDERING
THAT THERE WAS NO WRITTEN CONTRACT THAT WAS EVER EXECUTED BY THE PARTIES
IN THIS CASE, BUT MERELY UNILATERAL WRITTEN COMMUNICATIONS, AT BEST
CONSTITUTING OFFERS AND COUNTER-OFFERS.
B.
THAT THE QUANTUM OF PROOF IS WANTING TO PROVE THE ALLEGED PERFECTION OF
CONTRACT OF SALE BETWEEN THE PARTIES BASED ON THE SOLE, UNCORROBORATED,
ORAL TESTIMONY THUS FAR PRESENTED BY THE RESPONDENTS.
C.

THAT THE BURDEN OF PROOF THAT THERE WAS PERFECTION OF THE CONTRACT OF
SALE BETWEEN THE PARTIES BASICALLY REST WITH THE RESPONDENTS,
NOTWITHSTANDING THE NON-OBJECTION ON THE PART OF HEREIN PETITIONER DURING
THE INTRODUCTION OF THAT PAROL EVIDENCE; THE ADMISSIBILITY OF PETITIONERS
(sic.) PAROL EVIDENCE DOES NOT AUTOMATICALLY RIPEN THE TESTIMONY AS A TRUTH
RESPECTING A MATTER OF FACT AS ITS CREDIBILITY AND TRUSTWORTHINESS AND
WEIGHT ARE STILL SUBJECT TO JUDICIAL SCRUTINY AND APPRECIATION.
D.
THAT THERE WAS ACTUALLY OPPOSITION ON THE PART OF THE PETITIONER TO THE
CONTENTS OF THE ORAL TESTIMONY OF THE RESPONDENT REGARDING THE ALLEGED
PERFECTION OF CONTRACT OF SALE BECAUSE THE PETITIONER HAD ALREADY
INTERPOSED THEIR DEFENSES WHEN IT FILED A MEMORANDUM ATTACHING THEREIN THE
DOCUMENTARY AS WELL AS DECLARATIONS IN ITS PLEADINGS ON THE NON-PERFECTION
OF SUCH CONTRACT WHEN THE CASE WAS THEN SUBMITTED FOR JUDGMENT ON THE
PLEADINGS, AS AGREED BY THE PARTIES DURING THE PRE-TRIAL, AND SUCH EVIDENCES
WERE ALREADY PASSED UPON BY THE COURT WHEN IT RENDERED A JUDGMENT DATED
APRIL 25, 1995.
We GRANT the petition.
ISSUE:
At the very core of the controversy is the question of whether or not there actually was a
perfected contract of sale between petitioner and respondents, for which the Court may compel
petitioner to issue a board resolution approving the sale and to execute the final deed of sale in
respondents favor, and/or hold petitioner liable for a breach thereof. Needless to state, without a
perfected contract of sale, there could be no cause of action for specific performance or breach
thereof.
The trial court went on one direction by ruling in its earlier decision of April 25, 1995 that there
was no perfected contract, but upon respondents motion for reconsideration, went exactly the
opposite path by completely reversing itself in its herein challenged decision of September 26, 1996.
Apparently, the trial courts ruling that there was already a perfected contract of sale was
premised on its following factual findings:
1.

That plaintiff [respondents] made a downpayment in a check that was

subsequently encashed by the defendant [petitioner] bank;

2.

That the sister-in-law of plaintiff [respondents] entered into the same

arrangement and was able to buy the property she wanted to buy from defendant
[petitioner] bank;

3.

That defendant [petitioner] never presented any witness to rebut the positive and
clear testimony of plaintiff [respondents] that it was a perfected contract of sale
entered into by the former with the defendant [petitioner] bank.[10]

Sustaining the foregoing factual findings of the trial court, the appellate court wrote in its
assailed decision of March 5, 1999:
This positive and clear testimony of [respondent] Ong was not objected to nor rebutted by
the [petiotioner]. Notably, the bank personnel involved in the transaction, namely, Roy Palasan and
the Branch Manager of the [petitioners] Cagayan de Oro Branch, Joe Lagrito, were never presented
to refute the testimony of the [respondents] that the bank has agreed to sell the property to the
[respondents]. Suffice it to state that [respondents] were entitled to rely on the representation of
Lagrito who, after all, is the banks manager. Under the premise that a bank is bound by the
obligation contracted by its officers, the contract of sale between [petitioner] and the [respondents]
was perfected when Palasan and Lagrito communicated the approval of the sale of the lot to the
[respondents].
Significantly, the unrebutted testimony of Francisco Ong reveals that Norma Silfavan, [respondents]
sister, made a similar offer to the [petitioner] under the same terms and conditions as to that of the
[respondents], and was likewise assured by the same bank personnel that her offer, along with the
[respondents] offer was already approved. Eventually, the transaction resulted in a consummated
sale between Silfavan and DBP. Under these premises, We can not see any reason why the
[petitioner] did not accord the same treatment to the [respondents] who were similarly situated.
ISSUE :Whether or not the offer to purchase transaction bind the bank to a perfected
contract of sale
HELD: NO
Evidently, the two (2) courts below were convinced that the actuation of Palasan, a mere
bank clerk, upon which respondents relied in believing that their offer to purchase was
already approved by the bank manager, would bind the bank to a perfected contract of sale
between the parties in this case. The Court of Appeals further added that the acceptance of the
offer to purchase was sufficiently established from the parol evidence adduced by respondents
during the trial.
We do not agree.
Concededly, in petitions for review on certiorari, our task is not to review once again the
factual findings of the Court of Appeals and the trial court, but to determine if, on the basis of the
facts thus found, the conclusions of law reached are correct or not.
Judging from the findings of the two (2) courts below and the testimony of respondent Francisco
Ong himself, it appears clear to us that the transaction between the respondents and the
petitioner was limited to Palasan, one of the clerks of petitioners branch in Cagayan de Oro
City. Lagrito, the branch manager, had no personal or direct communication with

respondents to express his alleged consent to the sale transaction. Thus, the undisputed
evidence showed that it was Palasan, a mere bank clerk, and not the branch manager himself who
assured respondents that theirs was a closed deal.
We are very much aware of our pronouncement in Rural Bank of Milaor vs. Ocfemia,[11] involving
a mandamus suit where the supposed buyer of a foreclosed property from a bank sought a court
order to compel the bank to issue the required board resolution confirming the sale between the
parties therein. There, this Court, speaking thru Mr. Justice Artemio Panganiban, stated:
Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale, petitioner
has failed to file an answer to the Petition below within the reglementary period, let alone present
evidence controverting such authority. Indeed, when one of herein respondents, Marife S. Nio, went
to the bank to ask for the board resolution, she was merely told to bring the receipts. The bank failed
to categorically declare that Tena had no authority. This Court stresses the following:
. . . Corporate transactions would speedily come to a standstill were every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular
they should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38 Phil.
634, 654-655, that
In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the
situation as it presents itself to the third party with whom the contract is made. Naturally he can have
little or no information as to what occurs in corporate meetings; and he must necessarily rely upon
the external manifestation of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance
with law; and we would be sorry to announce a doctrine which would permit the property of man in
the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority had been used in the manner disclosed
in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to do acts within the scope of an apparent authority,
and thus holds him out to the public as possessing power to do those acts, the corporation
will, as against any one who has in good faith dealt with the corporation through such agent,
be estopped from denying his authority; and where it is said 'if the corporation permits this
means the same as 'if the thing is permitted by the directing power of the corporation. [12]
In this light, the bank is estopped from questioning the authority of the bank manager to
enter into the contract of sale. If a corporation knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority, it holds the agent out to the
public as possessing the power to do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying the
agent's authority.[13]
Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale. Accordingly, it has a
clear legal duty to issue the board resolution sought by respondents. Having authorized her to sell
the property, it behooves the bank to confirm the Deed of Sale so that the buyers may enjoy its full
use.

DIFFERENCE IN THE CASE AT BAR:

There is, however, a striking and very material difference between the aforecited case
and the one at bar. For, unlike in Milaor where it was the branch manager who approved the sale
for and in behalf of the bank, here, there is absolutely no approval whatsoever by any
responsible bank officer of the petitioner. True it is that the signature of branch manager Lagrito
appears below the typewritten word NOTED at the bottom of respondents offer to purchase dated
May 25, 1988.[14] By no stretch of imagination, however, can the mere NOTING of such an offer be
taken to mean an approval of the supposed sale. Quite the contrary, the very circumstance that
the offer to purchase was merely NOTED by the branch manager and not approved, is a
clear indication that there is no perfected contract of sale to speak of.
The representation of Roy Palasan, a mere clerk at petitioners Cagayan de Oro City
branch, that the manager had already approved the sale, even if true, cannot bind the
petitioner bank to a contract of sale with respondents, it being obvious to us that such a clerk
is not among the bank officers upon whom such putative authority may be reposed by a third
party. There is, thus, no legal basis to bind petitioner into any valid contract of sale with the
respondents, given the absolute absence of any approval or consent by any responsible
officer of petitioner bank.
And because there is here no perfected contract of sale between the parties,
respondents action for breach of contract and/or specific performance is simply without any
leg to stand on and must therefore fall.

ENCASHMENT OF CHECK:
We also disagree with the Court of Appeals that the encashment of the check
representing the P14,000.00 deposit in relation to respondents offer to purchase is an
indication or proof of perfection of a contract of sale. It must be noted that the very
documents[15] signed by the respondents as their offer to purchase unmistakably state that the
deposit shall only form part of the purchase price if the offer to purchase is approved, it
being expressly understood xxx that the same (i.e., the deposit) does not bind DBP to the
offer until my/our receipt of its approval by higher authorities of the bank. It may be so that
the official receipt issued therefor by the petitioner termed such deposit as a downpayment. But the
very written offers of the respondents unequivocably and invariably speak of such amount as
deposit, above deposit, we are depositing the amount of P14,000.00. Since there never
was any approval or acceptance by the higher authorities of petitioner of respondents offer
to purchase, the encashment of the check can not in any way represent partial payment of
any purchase price.
With the hard reality that no approval or acceptance of respondents offer to buy exists in this
case, any independent transaction between petitioner and another third-party, like the one involving

respondents sister, would be irrelevant and immaterial insofar as respondents own transaction with
the petitioner is concerned. Besides, apart from saying that respondents sister made a similar offer
to the [petitioner] under the same terms and conditions as to that of the [respondents], and was
likewise assured by the same bank personnel that her offer xxx was already approved, which
eventually resulted into a consummated sale between (the sister) and DBP, the Court of Appeals
made no finding that the sisters transaction with the petitioner was made exactly under the same
circumstances obtaining in the present case. In any event, petitioners favorable action on the offer
of respondents sister is hardly, if ever, relevant and determinative in the resolution of the legal issue
presented in this case.
In sum, we cannot, in law, sustain the herein challenged issuances of the Court of Appeals.
WHEREFORE, the instant petition is GRANTED and the assailed decision and resolution of the
Court of Appeals REVERSED and SET ASIDE. The complaint filed in this case is accordingly
DISMISSED.
No pronouncement as to costs.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 163553

December 11, 2009

YUN KWAN BYUNG, Petitioner,

vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, Respondent.
DECISION
CARPIO, J.:
The Case
Yun Kwan Byung (petitioner) filed this Petition for Review1 assailing the Court of Appeals
Decision2 dated 27 May 2003 in CA-G.R. CV No. 65699 as well as the Resolution3 dated 7 May
2004 denying the Motion for Reconsideration. In the assailed decision, the Court of Appeals (CA)
affirmed the Regional Trial Courts Decision4dated 6 May 1999. The Regional Trial Court of Manila,
Branch 13 (trial court), dismissed petitioners demand against respondent Philippine Amusement and
Gaming Corporation (PAGCOR) for the redemption of gambling chips.
The Facts
PAGCOR is a government-owned and controlled corporation tasked to establish and operate
gambling clubs and casinos as a means to promote tourism and generate sources of revenue for the
government. To achieve these objectives, PAGCOR is vested with the power to enter into contracts
of every kind and for any lawful purpose that pertains to its business. Pursuant to this authority,
PAGCOR launched its Foreign Highroller Marketing Program (Program). The Program aims to invite
patrons from foreign countries to play at the dollar pit of designated PAGCOR-operated casinos
under specified terms and conditions and in accordance with industry practice. 5
The Korean-based ABS Corporation was one of the international groups that availed of the Program.
In a letter-agreement dated 25 April 1996 (Junket Agreement), ABS Corporation agreed to bring in
foreign players to play at the five designated gaming tables of the Casino Filipino Silahis at the
Grand Boulevard Hotel in Manila (Casino Filipino). The relevant stipulations of the Junket Agreement
state:
1. PAGCOR will provide ABS Corporation with separate junket chips. The junket chips will be
distinguished from the chips being used by other players in the gaming tables.
ABS Corporation will distribute these junket chips to its players and at the end of the playing
period, ABS Corporation will collect the junket chips from its players and make an accounting
to the casino treasury.
2. ABS Corporation will assume sole responsibility to pay the winnings of its foreign players
and settle the collectibles from losing players.
3. ABS Corporation shall hold PAGCOR absolutely free and harmless from any damage,
claim or liability which may arise from any cause in connection with the Junket Agreement.

5. In providing the gaming facilities and services to these foreign players, PAGCOR is
entitled to receive from ABS Corporation a 12.5% share in the gross winnings of ABS
Corporation or 1.5 million US dollars, whichever is higher, over a playing period of 6 months.
PAGCOR has the option to extend the period.6
Petitioner, a Korean national, alleges that from November 1996 to March 1997, he came to the
Philippines four times to play for high stakes at the Casino Filipino.7 Petitioner claims that in the
course of the games, he was able to accumulate gambling chips worth US$2.1 million. Petitioner
presented as evidence during the trial gambling chips with a face value of US$1.1 million. Petitioner
contends that when he presented the gambling chips for encashment with PAGCORs employees or
agents, PAGCOR refused to redeem them.8
Petitioner brought an action against PAGCOR seeking the redemption of gambling chips valued at
US$2.1 million. Petitioner claims that he won the gambling chips at the Casino Filipino, playing
continuously day and night. Petitioner alleges that every time he would come to Manila, PAGCOR
would extend to him amenities deserving of a high roller. A PAGCOR official who meets him at the
airport would bring him to Casino Filipino, a casino managed and operated by PAGCOR. The card
dealers were all PAGCOR employees, the gambling chips, equipment and furnitures belonged to
PAGCOR, and PAGCOR enforced all the regulations dealing with the operation of foreign exchange
gambling pits. Petitioner states that he was able to redeem his gambling chips with the cashier
during his first few winning trips. But later on, the casino cashier refused to encash his gambling
chips so he had no recourse but to deposit his gambling chips at the Grand Boulevard Hotels
deposit box, every time he departed from Manila.9
PAGCOR claims that petitioner, who was brought into the Philippines by ABS Corporation, is a junket
player who played in the dollar pit exclusively leased by ABS Corporation for its junket players.
PAGCOR alleges that it provided ABS Corporation with distinct junket chips. ABS Corporation
distributed these chips to its junket players. At the end of each playing period, the junket players
would surrender the chips to ABS Corporation. Only ABS Corporation would make an accounting of
these chips to PAGCORs casino treasury.10
As additional information for the junket players playing in the gaming room leased to ABS
Corporation, PAGCOR posted a notice written in English and Korean languages which reads:
NOTICE
This GAMING ROOM is exclusively operated by ABS under arrangement with PAGCOR, the former
is solely accountable for all PLAYING CHIPS wagered on the tables. Any financial
ARRANGEMENT/TRANSACTION between PLAYERS and ABS shall only be binding upon said
PLAYERS and ABS.11
PAGCOR claims that this notice is a standard precautionary measure 12 to avoid confusion between
junket players of ABS Corporation and PAGCORs players.
PAGCOR argues that petitioner is not a PAGCOR player because under PAGCORs gaming rules,
gambling chips cannot be brought outside the casino. The gambling chips must be converted to

cash at the end of every gaming period as they are inventoried every shift. Under PAGCORs rules, it
is impossible for PAGCOR players to accumulate two million dollars worth of gambling chips and to
bring the chips out of the casino premises.13
Since PAGCOR disclaimed liability for the winnings of players recruited by ABS Corporation and
refused to encash the gambling chips, petitioner filed a complaint for a sum of money before the trial
court.14 PAGCOR filed a counterclaim against petitioner. Then, trial ensued.
On 6 May 1999, the trial court dismissed the complaint and counterclaim. Petitioner appealed the
trial courts decision to the CA. On 27 May 2003, the CA affirmed the appealed decision. On 27 June
2003, petitioner moved for reconsideration which was denied on 7 May 2004.
Aggrieved by the CAs decision and resolution, petitioner elevated the case before this Court.
The Ruling of the Trial Court
The trial court ruled that based on PAGCORs charter,15 PAGCOR has no authority to lease
any portion of the gambling tables to a private party like ABS Corporation. Section 13 of
Presidential Decree No. 1869 or the PAGCORs charter states:
Sec. 13. Exemptions xxx
(4) Utilization of Foreign Currencies The Corporation shall have the right and authority, solely and
exclusively in connection with the operations of the casino(s), to purchase, receive, exchange and
disburse foreign exchange, subject to the following terms and conditions:
(a) A specific area in the casino(s) or gaming pit shall be put up solely and exclusively for
players and patrons utilizing foreign currencies;
(b) The Corporation shall appoint and designate a duly accredited commercial bank agent of
the Central Bank, to handle, administer and manage the use of foreign currencies in the
casino(s);
(c) The Corporation shall provide an office at casino(s) exclusively for the employees of the
designated bank, agent of the Central Bank, where the Corporation shall maintain a dollar
account which will be utilized exclusively for the above purpose and the casino dollar
treasury employees;
(d) Only persons with foreign passports or certificates of identity (for Hong Kong patron only)
duly issued by the government or country of their residence will be allowed to play in the
foreign exchange gaming pit;

(e) Only foreign exchange prescribed to form part of the Philippine International Reserve and
the following foreign exchange currencies: Australian Dollar, Singapore Dollar, Hong Kong
Dollar, shall be used in this gaming pit;
(f) The disbursement, administration, management and recording of foreign exchange
currencies used in the casino(s) shall be carried out in accordance with existing foreign
exchange regulations, and periodical reports of the transactions in such foreign exchange
currencies by the Corporation shall be duly recorded and reported to the Central Bank thru
the designated Agent Bank; and
(g) The Corporation shall issue the necessary rules and regulations for the guidance and
information of players qualified to participate in the foreign exchange gaming pit, in order to
make certain that the terms and conditions as above set forth are strictly complied with.
The trial court held that only PAGCOR could use foreign currency in its gaming tables. When
PAGCOR accepted only a fixed portion of the dollar earnings of ABS Corporation in the concept of a
lease of facilities, PAGCOR shared its franchise with ABS Corporation in violation of the PAGCORs
charter. Hence, the Junket Agreement is void. Since the Junket Agreement is not permitted by
PAGCORs charter, the mutual rights and obligations of the parties to this case would be resolved
based on agency and estoppel.16
The trial court found that the petitioner wanted to redeem gambling chips that were specifically used
by ABS Corporation at its gaming tables. The gambling chips come in distinctive orange or yellow
colors with stickers bearing denominations of 10,000 or 1,000. The 1,000 gambling chips are smaller
in size and the words "no cash value" marked on them. The 10,000 gambling chips do not reflect the
"no cash value" sign. The senior treasury head of PAGCOR testified that these were the gambling
chips used by the previous junket operators and PAGCOR merely continued using them. However,
the gambling chips used in the regular casino games were of a different quality.17
The trial court pointed out that PAGCOR had taken steps to warn players brought in by all junket
operators, including ABS Corporation, that they were playing under special rules. Apart from the
different kinds of gambling chips used, the junket players were confined to certain gaming rooms. In
these rooms, notices were posted that gambling chips could only be encashed there and nowhere
else. A photograph of one such notice, printed in Korean and English, stated that the gaming room
was exclusively operated by ABS Corporation and that ABS Corporation was solely accountable for
all the chips wagered on the gaming tables. Although petitioner denied seeing this notice, this
disclaimer has the effect of a negative evidence that can hardly prevail against the positive
assertions of PAGCOR officials whose credibility is also not open to doubt. The trial court concluded
that petitioner had been alerted to the existence of these special gambling rules, and the mere fact
that he continued to play under the same restrictions over a period of several months confirms his
acquiescence to them. Otherwise, petitioner could have simply chose to stop gambling.18
In dismissing petitioners complaint, the trial court concluded that petitioners demand
against PAGCOR for the redemption of the gambling chips could not stand. The trial court
stated that petitioner, a stranger to the agreement between PAGCOR and ABS Corporation,
could not under principles of equity be charged with notice other than of the apparent

authority with which PAGCOR had clothed its employees and agents in dealing with
petitioner. Since petitioner was made aware of the special rules by which he was playing at
the Casino Filipino, petitioner could not now claim that he was not bound by them. The trial
court explained that in an unlawful transaction, the courts will extend equitable relief only to a party
who was unaware of all its dimensions and whose ignorance of them exposed him to the risk of
being exploited by the other. Where the parties enter into such a relationship with the opportunity to
know all of its ramifications, as in this case, there is no room for equitable considerations to come to
the rescue of any party. The trial court ruled that it would leave the parties where they are. 19
The Ruling of the Court of Appeals
In dismissing the appeal, the appellate court addressed the four errors assigned by petitioner.
First, petitioner maintains that he was never a junket player of ABS Corporation. Petitioner also
denies seeing a notice that certain gaming rooms were exclusively operated by entities under
special agreement.20
The CA ruled that the records do not support petitioners theory. Petitioners own testimony reveals
that he enjoyed special accommodations at the Grand Boulevard Hotel. This similar accommodation
was extended to players brought in by ABS Corporation and other junket operators. Petitioner
cannot disassociate himself from ABS Corporation for it is unlikely that an unknown high roller would
be accorded choice accommodations by the hotel unless the accommodation was facilitated by a
junket operator who enjoyed such privilege.21
The CA added that the testimonies of PAGCORs employees affirming that notices were posted in
English and Korean in the gaming areas are credible in the absence of any convincing proof of ill
motive. Further, the specified gaming areas used only special chips that could be bought and
exchanged at certain cashier booths in that area.22
Second, petitioner attacks the validity of the contents of the notice. Since the Junket Agreement is
void, the notice, which was issued pursuant to the Junket Agreement, is also void and cannot affect
petitioner.23
The CA reasoned that the trial court never declared the notice valid and neither did it enforce the
contents thereof. The CA emphasized that it was the act of cautioning and alerting the players that
was upheld. The trial court ruled that signs and warnings were in place to inform the public,
petitioner included, that special rules applied to certain gaming areas even if the very agreement
giving rise to these rules is void.24
Third, petitioner takes the position that an implied agency existed between PAGCOR and ABS
Corporation.25
The CA disagreed with petitioners view. A void contract has no force and effect from the very
beginning. It produces no effect either against or in favor of anyone. Neither can it create, modify or
extinguish the juridical relation to which it refers. Necessarily, the Junket Agreement, being void from
the beginning, cannot give rise to an implied agency. The CA explained that it cannot see how the

principle of implied agency can be applied to this case. Article 188326 of the Civil Code applies only
to a situation where the agent is authorized by the principal to enter into a particular transaction, but
instead of contracting on behalf of the principal, the agent acts in his own name. 27
The CA concluded that no such legal fiction existed between PAGCOR and ABS Corporation.
PAGCOR entered into a Junket Agreement to lease to ABS Corporation certain gaming areas. It was
never PAGCORs intention to deal with the junket players. Neither did PAGCOR intend ABS
Corporation to represent PAGCOR in dealing with the junket players. Representation is the basis of
agency but unfortunately for petitioner none is found in this case.28
The CA added that the special gaming chips, while belonging to PAGCOR, are mere accessories in
the void Junket Agreement with ABS Corporation. In Article 1883, the phrase "things belonging to the
principal" refers only to those things or properties subject of a particular transaction authorized by
the principal to be entered into by its purported agent. Necessarily, the gambling chips being mere
incidents to the void lease agreement cannot fall under this category.29
The CA ruled that Article 215230 of the Civil Code is also not applicable. The circumstances relating
to negotiorum gestio are non-existent to warrant an officious manager to take over the management
and administration of PAGCOR.31
Fourth, petitioner asks for equitable relief.32
The CA explained that although petitioner was never a party to the void Junket Agreement, petitioner
cannot deny or feign blindness to the signs and warnings all around him. The notices, the special
gambling chips, and the separate gaming areas were more than enough to alert him that he was
playing under different terms. Petitioner persisted and continued to play in the casino. Petitioner also
enjoyed the perks extended to junket players of ABS Corporation. For failing to heed these signs and
warnings, petitioner can no longer be permitted to claim equitable relief. When parties do not come
to court with clean hands, they cannot be allowed to profit from their own wrong doing. 33
The Issues
Petitioners raise three issues in this petition:
1. Whether the CA erred in holding that PAGCOR is not liable to petitioner, disregarding the
doctrine of implied agency, or agency by estoppel;
2. Whether the CA erred in using intent of the contracting parties as the test for creation of
agency, when such is not relevant since the instant case involves liability of the presumed
principal in implied agency to a third party; and
3. Whether the CA erred in failing to consider that PAGCOR ratified, or at least adopted, the
acts of the agent, ABS Corporation.34
The Ruling of the Court

The petition lacks merit.

Courts will not enforce debts arising from illegal gambling
Gambling is prohibited by the laws of the Philippines as specifically provided in Articles 195 to 199 of
the Revised Penal Code, as amended. Gambling is an act beyond the pale of good morals,35 and is
thus prohibited and punished to repress an evil that undermines the social, moral, and economic
growth of the nation.36 Presidential Decree No. 1602 (PD 1602),37 which modified Articles 195-199 of
the Revised Penal Code and repealed inconsistent provisions,38 prescribed stiffer penalties on illegal
gambling.39
ISSUE: whether PAGCOR can validly share its franchise with junket operators to operate
gambling casinos in the country.
HELD:
As a rule, all forms of gambling are illegal. The only form of gambling allowed by law is that
stipulated under Presidential Decree No. 1869, which gave PAGCOR its franchise to maintain and
operate gambling casinos. The issue then turns on whether PAGCOR can validly share its franchise
with junket operators to operate gambling casinos in the country. Section 3(h) of PAGCORs charter
states:
Section 3. Corporate Powers. - The Corporation shall have the following powers and functions,
among others:
xxx
h) to enter into, make, perform, and carry out contracts of every kind and for any lawful
purpose pertaining to the business of the Corporation, or in any manner incident thereto, as
principal, agent or otherwise, with any person, firm, association, or corporation.
xxx
The Junket Agreement would be valid if under Section 3(h) of PAGCORs charter, PAGCOR could
share its gambling franchise with another entity. In Senator Jaworski v. Phil. Amusement and
Gaming Corp.,40 the Court discussed the extent of the grant of the legislative franchise to PAGCOR
on its authority to operate gambling casinos:
A legislative franchise is a special privilege granted by the state to corporations. It is a privilege of
public concern which cannot be exercised at will and pleasure, but should be reserved for public
control and administration, either by the government directly, or by public agents, under such
conditions and regulations as the government may impose on them in the interest of the public. It is
Congress that prescribes the conditions on which the grant of the franchise may be made. Thus the
manner of granting the franchise, to whom it may be granted, the mode of conducting the business,
the charter and the quality of the service to be rendered and the duty of the grantee to the public in
exercising the franchise are almost always defined in clear and unequivocal language.

After a circumspect consideration of the foregoing discussion and the contending positions
of the parties, we hold that PAGCOR has acted beyond the limits of its authority when it
passed on or shared its franchise to SAGE.
In the Del Mar case where a similar issue was raised when PAGCOR entered into a joint venture
agreement with two other entities in the operation and management of jai alai games, the Court, in
an En Banc Resolution dated 24 August 2001, partially granted the motions for clarification filed by
respondents therein insofar as it prayed that PAGCOR has a valid franchise, but only by itself (i.e.
not in association with any other person or entity), to operate, maintain and/or manage the game of
jai-alai.
In the case at bar, PAGCOR executed an agreement with SAGE whereby the former grants the
latter the authority to operate and maintain sports betting stations and Internet gaming
operations. In essence, the grant of authority gives SAGE the privilege to actively participate,
partake and share PAGCORs franchise to operate a gambling activity. The grant of franchise
is a special privilege that constitutes a right and a duty to be performed by the grantee. The
grantee must not perform its activities arbitrarily and whimsically but must abide by the limits
set by its franchise and strictly adhere to its terms and conditionalities. A corporation as a
creature of the State is presumed to exist for the common good. Hence, the special privileges
and franchises it receives are subject to the laws of the State and the limitations of its
charter. There is therefore a reserved right of the State to inquire how these privileges had
been employed, and whether they have been abused. (Emphasis supplied)
Thus, PAGCOR has the sole and exclusive authority to operate a gambling activity. While
PAGCOR is allowed under its charter to enter into operators or management contracts,
PAGCOR is not allowed under the same charter to relinquish or share its franchise. PAGCOR
cannot delegate its power in view of the legal principle of delegata potestas delegare non
potest, inasmuch as there is nothing in the charter to show that it has been expressly
authorized to do so.41
Similarly, in this case, PAGCOR, by taking only a percentage of the earnings of ABS Corporation
from its foreign currency collection, allowed ABS Corporation to operate gaming tables in the dollar
pit. The Junket Agreement is in direct violation of PAGCORs charter and is therefore void.
Since the Junket Agreement violates PAGCORs charter, gambling between the junket player and
the junket operator under such agreement is illegal and may not be enforced by the courts. Article
201442 of the Civil Code, which refers to illegal gambling, states that no action can be maintained by
the winner for the collection of what he has won in a game of chance.
Although not raised as an issue by petitioner, we deem it necessary to discuss the applicability of
Republic Act No. 948743 (RA 9487) to the present case.

RA 9487 amended the PAGCOR charter, granting PAGCOR the power to enter into special
agreement with third parties to share the privileges under its franchise for the operation of gambling
casinos:
Section 1. The Philippine Amusement and Gaming Corporation (PAGCOR) franchise granted under
Presidential Decree No. 1869 otherwise known as the PAGCOR Charter, is hereby further amended
to read as follows:
xxx
(2) Section 3(h) is hereby amended to read as follows:
"SEC. 3. Corporate Powers. "x x x
"(h) to enter into, make, conclude, perform, and carry out contracts of every kind and nature and for
any lawful purpose which are necessary, appropriate, proper or incidental to any business or
purpose of the PAGCOR, including but not limited to investment agreements, joint venture
agreements, management agreements, agency agreements, whether as principal or as an agent,
manpower supply agreements, or any other similar agreements or arrangements with any person,
firm, association or corporation." (Boldfacing supplied)
PAGCOR sought the amendment of its charter precisely to address and remedy the legal
impediment raised in Senator Jaworski v. Phil. Amusement and Gaming Corp.
Unfortunately for petitioner, RA 9487 cannot be applied to the present case. The Junket Agreement
was entered into between PAGCOR and ABS Corporation on 25 April 1996 when the PAGCOR
charter then prevailing (PD 1869) prohibited PAGCOR from entering into any arrangement with a
third party that would allow such party to actively participate in the casino operations.
It is a basic principle that laws should only be applied prospectively unless the legislative intent to
give them retroactive effect is expressly declared or is necessarily implied from the language
used.44 RA 9487 does not provide for any retroactivity of its provisions. All laws operate prospectively
absent a clear contrary language in the text,45 and that in every case of doubt, the doubt will be
resolved against the retroactive operation of laws.46
Thus, petitioner cannot avail of the provisions of RA 9487 as this was not the law when the acts
giving rise to the claimed liabilities took place. This makes the gambling activity participated in by
petitioner illegal. Petitioner cannot sue PAGCOR to redeem the cash value of the gambling chips or
recover damages arising from an illegal activity for two reasons. First, petitioner engaged in
gambling with ABS Corporation and not with PAGCOR. Second, the court cannot assist petitioner in
enforcing an illegal act. Moreover, for a court to grant petitioners prayer would mean enforcing the
Junket Agreement, which is void.

Petitioner claims that he is a third party proceeding against the liability of a presumed
principal and claims relief, alternatively, on the basis of implied agency or agency by
estoppel.
Now, to address the issues raised by petitioner in his petition, petitioner claims that he is a third party
proceeding against the liability of a presumed principal and claims relief, alternatively, on the basis of
implied agency or agency by estoppel.
Article 1869 of the Civil Code states that implied agency is derived 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. Implied agency, being an actual agency, is a fact to be
proved by deductions or inferences from other facts.47
On the other hand, apparent authority is based on estoppel and can arise from two instances. First,
the principal may knowingly permit the agent to hold himself out as having such authority,
and the principal becomes estopped to claim that the agent does not have such authority. Second,
the principal may clothe the agent with the indicia of authority as to lead a reasonably
prudent person to believe that the agent actually has such authority.48 In an agency by
estoppel, there is no agency at all, but the one assuming to act as agent has apparent or
ostensible, although not real, authority to represent another.49
The law makes no presumption of agency and proving its existence, nature and extent is incumbent
upon the person alleging it.50 Whether or not an agency has been created is a question to be
determined by the fact that one represents and is acting for another. 51
Acts and conduct of PAGCOR negates the existence of an implied agency or an agency by
estoppel
Petitioner alleges that there is an implied agency. Alternatively, petitioner claims that even assuming
that no actual agency existed between PAGCOR and ABS Corporation, there is still an agency by
estoppel based on the acts and conduct of PAGCOR showing apparent authority in favor of ABS
Corporation. Petitioner states that one factor which distinguishes agency from other legal precepts is
control and the following undisputed facts show a relationship of implied agency:
1. Three floors of the Grand Boulevard Hotel52 were leased to PAGCOR for conducting
gambling operations;53
2. Of the three floors, PAGCOR allowed ABS Corporation to use one whole floor for foreign
exchange gambling, conducted by PAGCOR dealers using PAGCOR facilities, operated by
PAGCOR employees and using PAGCOR chips bearing the PAGCOR logo;54
3. PAGCOR controlled the release, withdrawal and return of all the gambling chips given to
ABS Corporation in that part of the casino and at the end of the day, PAGCOR conducted an
inventory of the gambling chips;55

4. ABS Corporation accounted for all gambling chips with the Commission on Audit (COA),
the official auditor of PAGCOR;56
5. PAGCOR enforced, through its own manager, all the rules and regulations on the
operation of the gambling pit used by ABS Corporation.57
Petitioners argument is clearly misplaced. The basis for agency is representation,58 that is, the agent
acts for and on behalf of the principal on matters within the scope of his authority and said acts have
the same legal effect as if they were personally executed by the principal. 59 On the part of the
principal, there must be an actual intention to appoint or an intention naturally inferable from his
words or actions, while on the part of the agent, there must be an intention to accept the
appointment and act on it.60 Absent such mutual intent, there is generally no agency.61
There is no implied agency in this case because PAGCOR did not hold out to the public as
the principal of ABS Corporation. PAGCORs actions did not mislead the public into believing
that an agency can be implied from the arrangement with the junket operators, nor did it hold
out ABS Corporation with any apparent authority to represent it in any capacity. The Junket
Agreement was merely a contract of lease of facilities and services.
The players brought in by ABS Corporation were covered by a different set of rules in acquiring and
encashing chips. The players used a different kind of chip than what was used in the regular gaming
areas of PAGCOR, and that such junket players played specifically only in the third floor area and
did not mingle with the regular patrons of PAGCOR. Furthermore, PAGCOR, in posting notices
stating that the players are playing under special rules, exercised the necessary precaution to warn
the gaming public that no agency relationship exists.1avvphi1
For the second assigned error, petitioner claims that the intention of the parties cannot apply
to him as he is not a party to the contract.
For the second assigned error, petitioner claims that the intention of the parties cannot apply to him
as he is not a party to the contract.
We disagree. The Court of Appeals correctly used the intent of the contracting parties in determining
whether an agency by estoppel existed in this case. An agency by estoppel, which is similar to the
doctrine of apparent authority requires proof of reliance upon the representations, and that, in turn,
needs proof that the representations predated the action taken in reliance. 62
There can be no apparent authority of an agent without acts or conduct on the part of the principal
and such acts or conduct of the principal must have been known and relied upon in good faith and
as a result of the exercise of reasonable prudence by a third person as claimant, and such must
have produced a change of position to its detriment. 63 Such proof is lacking in this case.
In the entire duration that petitioner played in Casino Filipino, he was dealing only with ABS
Corporation, and availing of the privileges extended only to players brought in by ABS Corporation.
The facts that he enjoyed special treatment upon his arrival in Manila and special accommodations
in Grand Boulevard Hotel, and that he was playing in special gaming rooms are all indications that

petitioner cannot claim good faith that he believed he was dealing with PAGCOR. Petitioner cannot
be considered as an innocent third party and he cannot claim entitlement to equitable relief as well.
For his third and final assigned error, petitioner asserts that PAGCOR ratified the acts of ABS
Corporation.
The trial court has declared, and we affirm, that the Junket Agreement is void. A void or inexistent
contract is one which has no force and effect from the very beginning. Hence, it is as if it has never
been entered into and cannot be validated either by the passage of time or by ratification. 64 Article
1409 of the Civil Code provides that contracts expressly prohibited or declared void by law, such as
gambling contracts, "cannot be ratified."65
WHEREFORE, we DENY the petition. We AFFIRM the Court of Appeals Decision dated 27 May
2003 as well as the Resolution dated 7 May 2004 as modified by this Decision.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN,
ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P.
LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on
the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living
members with voting rightsshall be counted in determining the existence of a quorum during
members meetings. Dead members shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks the
reversal of the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR
SP No. 68202. The first assailed Resolution dismissed the appeal filed by petitioners with the CA.
Allegedly, without the proper authorization of the other petitioners, the Verification and Certification of
Non-Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The second
Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation
with fifteen (15) regular members, who also constitute the board of trustees. [4] During the annual
members meeting held on April 6, 1998, there were only eleven (11) [5] living member-trustees, as

four (4) had already died. Out of the eleven, seven (7) 6 attended the meeting through their
respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the
objection of Atty. Antonio C. Pacis, who argued that there was no quorum. 7 In the meeting,
Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four
deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), petitioners
maintained that the deceased member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all their rights (including the right to
vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of
quorum. She held that the basis for determining the quorum in a meeting of members should be their
number as specified in the articles of incorporation, not simply the number of living members. 8 She
explained that the qualifying phrase "entitled to vote" in Section 24 9 of the Corporation Code, which
provided the basis for determining a quorum for the election of directors or trustees, should be read
together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it prescribed
the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section
29 12 of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the
Decision of the hearing officer in toto.13 It found to be untenable their contention that the word
"members," as used in Section 52 14 of the Corporation Code, referred only to the living members of
a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and
Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special
Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.
Hence, this Petition. 16
Issues
Petitioners state the issues as follows:
ISSUE:
"Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK
corporations,dead members should still be counted in determination of quorum for purposed of
conducting the Annual Members Meeting.
"Petitioners have maintained before the courts below that the DEAD members should no longer be
counted in computing quorum primarily on the ground that members rights are personal and nontransferable as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even
involve a non-stock corporation as petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to resolve this question and
instead dismissed the petition for review on a technicality the failure to timely submit an SPA from
the petitioners authorizing theirco-petitioner Padilla, their counsel and also a petitioner before the
Court of Appeals, to sign the petition on behalf of the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in
accord with law particularly the pronouncements of this Honorable Court in Escorpizo v. University of
Baguio (306 SCRA 497),Robern Development Corporation v. Quitain (315 SCRA 150,) and MC
Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been given the petition below
and the merits of the case decided in petitioners favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition
below, on the basis of a defective Verification and Certification; and 2) whether dead members
should still be counted in the determination of the quorum, for purposes of conducting the annual
members meeting.
The Courts Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and Certification of NonForum Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof
that the signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners
submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on
their behalf. 18
In the interest of substantial justice, this initial procedural lapse may be excused. 19 There appears to
be no intention to circumvent the need for proper verification and certification, which are aimed at
assuring the truthfulness and correctness of the allegations in the Petition for Review and at
discouraging forum shopping. 20More important, the substantial merits of petitioners case and the
purely legal question involved in the Petition should be considered special circumstances 21 or
compelling reasons that justify an exception to the strict requirements of the verification and the
certification of non-forum shopping. 22
Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of electing directors or
trustees 23 and transacting some other business calling for or requiring the action or consent of the
shareholders or members, 24such as the amendment of the articles of incorporation and bylaws, sale
or disposition of all or substantially all corporate assets, consolidation and merger and the like, or
any other business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the board of directors or
trustees, who are charged with the management of the corporation. 25 The board, in turn, periodically
elects officers to carry out management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits, the
management and direction of the corporation are lodged with their representatives and agents -- the
board of directors or trustees. 26 In other words, acts of management pertain to the board; and those
of ownership, to the stockholders or members. In the latter case, the board cannot act alone, but
must seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most important rights of a qualified shareholder
or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the
corporate affairs. 28The right to choose the persons who will direct, manage and operate the
corporation is significant, because it is the main way in which a stockholder can have a voice in the
management of corporate affairs, or in which a member in a nonstock corporation can have a say on
how the purposes and goals of the corporation may be achieved. 29 Once the directors or trustees
are elected, the stockholders or members relinquish corporate powers to the board in accordance
with law.
In the absence of an express charter or statutory provision to the contrary, the general rule is that
every member of a nonstock corporation, and every legal owner of shares in a stock corporation,
has a right to be present and to vote in all corporate meetings. Conversely, those who are not
stockholders or members have no right to vote. 30Voting may be expressed personally, or through
proxies who vote in their representative capacities. 31 Generally, the right to be present and to vote in
a meeting is determined by the time in which the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a
majority of the members in the case of non-stock corporations."
In stock corporations, the presence of a quorum is ascertained and counted on the basis of the
outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. The term outstanding capital stock as used in
this Code, means the total shares of stock issued under binding subscription agreements to

subscribers or stockholders, whether or not fully or partially paid, except treasury shares."
(Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders meeting, or whether a requisite proportion of the stock of the corporation is voted to
adopt a certain measure or act. Only stock actually issued and outstanding may be voted. 34 Under
Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided
in the articles of incorporation or declared delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares that have never passed to
the ownership of stockholders; or, having so passed, have again been purchased by the
corporation. 36 These shares are not to be taken into consideration in determining majorities. When
the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from the
corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share
may be deprived of voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, that there shall always be a class
or series of shares which have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights."
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the
lawmakers was to base the quorum mentioned in Section 52 on the number of outstanding voting
stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39 Members vote as persons, in
accordance with the law and the bylaws of the corporation. Each member shall be entitled to one
vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. 40 We hold that
when the principle for determining the quorum for stock corporations is applied by analogy to
nonstock corporations, only those who are actual members with voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the members representing the actual
number of voting rights, not
the number or numerical constant that may originally be specified in the articles of incorporation,
constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority vote of the
members"; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of
registered members of the association mentioned therein) plus one. The best evidence of who are
the present members of the corporation is the "membership book"; in the case of stock corporations,
it is the stock and transfer book. 43
Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the
articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless
the articles of incorporation or the bylaws provide for a greater majority). If the intention of the
lawmakers was to base the quorum in the meetings of stockholders or members on their absolute
number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the
only logical conclusion is that the legislature did not have that intention.
Effect of the Death
of a Member or Shareholder

Having thus determined that the quorum in a members meeting is to be reckoned as the actual
number of members of the corporation, the next question to resolve is what happens in the event of
the death of one of them.
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. 44
On the other hand, membership in and all rights arising from a nonstock corporation are personal
and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not "dead members" are entitled to
exercise their voting rights (through their executor or administrator), depends on those articles of
incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. 46 Section 91 of the Corporation Code further provides
that termination extinguishes all the rights of a member of the corporation, unless otherwise provided
in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped from the
membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to
be counted in determining the requisite vote in corporate matters or the requisite quorum for the
annual members meeting. With 11 remaining members, the quorum in the present case should be 6.
Therefore, there being a quorum, the annual members meeting, conducted with six 47 members
present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code
provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a
quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by
the remaining directors or trustees constituting a quorum is merely permissive, not
mandatory. 48 Corporations, therefore, may choose how vacancies in their respective boards may be

filled up -- either by the remaining directors constituting a quorum, or by the stockholders or

members in a regular or special meeting called for the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its
board of directors; that is, by a majority vote of the remaining members of the board. 50
While a majority of the remaining corporate members were present, however, the "election"
of the four trustees cannot be legally upheld for the obvious reason that it was held in an
annual meeting of the members, not of the board of trustees. We are not unmindful of the fact
that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS
bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the
remaining trustees. In other words, these remaining member-trustees must sit as a boardin order to
validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the board and that
by the constituent members of the corporation. The board of trustees must act, not individually
or separately, but as a body in a lawful meeting. On the other hand, in their annual meeting, the
members may be represented by their respective proxies, as in the contested annual members
meeting of GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of Appeals
are hereby REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace
Christian High School (GCHS) may convene and fill up the vacancies in the board, in accordance
with this Decision. No pronouncement as to costs in this instance.
SO ORDERED.
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson, First Division

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 159355

August 9, 2010

GABRIEL C. SINGSON, ANDRE NAVATO, EDGARDO P. ZIALCITA, ARACELI E. VILLANUEVA,

TYRONE M. REYES, JOSE CLEMENTE, JR., FEDERICO PASCUAL, ALEJANDRA C.
CLEMENTE, ALBERT P. FENIX, JR., and MELPIN A. GONZAGA, Petitioners,
vs.
COMMISSION ON AUDIT, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for certiorari seeking to set aside Decision No. 2002-081,1 dated April
23, 2002, of the Commission on Audit (COA), which affirmed the Decision No. 2000-008, 2 dated
June 1, 2000, and the Resolution in CAO I Decision No. 2000-012,3 dated August 11, 2000, of the
Corporate Audit Office I, and the COA Resolution No. 2003-115, 4 dated July 31, 2003, which denied
petitioners motion for reconsideration thereof and upheld the disallowance of petitioners
Representation and Transportation Allowance (RATA) in the total amount of P1,565,000.00 under
Notice of Disallowance No. 99-001-101 (96-96) dated June 7, 1999.
The antecedents are as follows:
The Philippine International Convention Center, Inc. (PICCI) is a government corporation whose sole
stockholder is the Bangko Sentral ng Pilipinas (BSP). Petitioner Araceli E. Villanueva was then a
member of the PICCI Board of Directors and Officer-in-Charge (OIC) of PICCI, while co-petitioners
Gabriel C. Singson, Andre Navato, Edgardo P. Zialcita, and Melpin A. Gonzaga, Alejandra C.
Clemente, Jose Clemente, Jr., Federico Pascual, Albert P. Fenix, Jr., and Tyrone M. Reyes were
then members of the PICCI Board of Directors and officials of the BSP. By virtue of the PICCI ByLaws, petitioners were authorized to receive P1,000.00 per diem each for every meeting attended.
Pursuant to its Monetary Board (MB) Resolution No. 155 dated January 5, 1994, as amended by MB
Resolution No. 34 dated January 12, 1994, the BSP MB granted additional monthly RATA, in the
amount of P1,500.00, to each of the petitioners, as members of the Board of Directors of PICCI.

Consequently, from January 1996 to December 1998, petitioners received their corresponding RATA
in the total amount of P1,565,000.00.
On June 7, 1999, then PICCI Corporate Auditor Adelaida A. Aldovino issued Notice of Disallowance
No. 99-001-101 (96-98),6 addressed to petitioner Araceli E. Villanueva (through then OIC Susan M.
Galang of the Accounting Division of PICCI), disallowing in audit the payment of petitioners RATA in
the total amount of P1,565,000.00,7 and directing them to settle immediately the said disallowances,
due to the following reasons: (a) As to petitioner Araceli E. Villanueva, there was double payment of
RATA to her as member of the PICCI Board and as OIC of PICCI, which was in violation of Section
8, Article IX-B of the 1987 Constitution and, moreover, Compensation Policy Guideline No. 6
provides that an official already granted commutable RATA and designated by competent authority to
perform duties in concurrent capacity as OIC of another position whether or not in the same agency
and entitled to similar benefits, shall not be granted said similar benefits, except where said similar
allowances are higher in rates than those of his regular position, in which case he may be allowed to
collect the difference thereof; and (b) As to petitioners Gabriel Singson, Andre Navato, Edgardo
Zialcita, Melpin Gonzaga, Alejandra Clemente, Jose Clemente, Jr., Federico Pascual, Albert P.
Fenix, Jr., and Tyrone M. Reyes, there was double payment of RATA to them as members of the
PICCI Board and as officers of BSP, which was in violation of Section 8, Article IX-B of the 1987
Constitution and PICCI By-laws and, further, the contemplation of the constitutional provisions which
authorized double compensation is construed to mean statutes passed by the national legislative
body and does not include resolutions passed by governing boards, i.e., Section 229 of the
Government Accounting and Auditing Manual.
In a letter8 dated September 27, 1999, petitioners, through Board Member and OIC of PICCI Araceli
E. Villanueva, sought reconsideration of the Notice of Disallowance No. 99-001-01 (96-98) dated
June 7, 1999.
In a letter9 dated October 14, 1999, PICCI Corporate Auditor Aldovino denied petitioners motion for
reconsideration and, on February 18, 2000, petitioners filed their Notice of Appeal 10 and Appeal
Memorandum.11
On June 1, 2000, Director Crescencio S. Sunico of the Corporate Audit Office I, COA, rendered a
Decision in CAO I Decision No. 2000-208 affirming the disallowance of the RATA received by
petitioners in their capacity as Directors of the PICCI Board. He stated that except for per diems,
Section 8, Article III of the PICCI By-Laws prohibits the payment of salary to directors in the form of
compensation or reimbursement of expenses, based upon the principle expression unius est
exclusio alterius (the express mention of one thing in a law means the exclusion of others not
expressly mentioned). Neither can the payment of RATA be legally founded on Section 30 of the
Corporation Code which states that in the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation as such directors, except for
reasonable per diems; provided, however, that any such compensation (other than per diems) may
be granted to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. The power to fix the
compensation which the directors shall receive, if any, is left to the corporation, to be determined in
its by-laws or by the vote of stockholders. The PICC By-Laws allows only the payment of per diem to
the directors. Thus, the BSP board resolution granting RATA of P1,500.00 to petitioners violated the

PICCI By-Laws. Director Sunico also explained that although MB Resolution No. 15, dated January
5, 1994, as amended by MB Resolution No. 34, dated January 12, 1994, would have the effect of
amending the PICCI By-laws, and may render the grant of RATA valid, such amendment, however,
had no effect because it failed to comply with the procedural requirements set forth under Section 48
of the Corporation Code.12
On August 11, 2000, Director Sunico issued a Resolution in CAO I Decision No. 2000-012, affirming
the disallowance of the RATA received by the petitioners in their capacity as directors in the total
amount ofP1,565,000.00.
On petition for review by petitioners, the COA rendered the assailed COA Decision No. 2002-081
dated April 23, 2002, affirming CAO I Decision No. 2000-008 dated June 1, 2000 and Notice of
Disallowance No. 99-001-101 (96-98) dated June 7, 1999. It also directed the Auditor to determine
the amounts to be refunded by petitioners and to enforce and monitor their settlement. It ruled that
petitioners receipt of the P1,500.00 RATA from the BSP for every meeting they attended as
members of the PICCI Board of Directors was not valid.
In COA Decision No. 2003-115, dated July 31, 2003, the COA issued a Resolution denying
petitioners motion for reconsideration and upheld the disallowance of the petitioners RATA
amounting to P1,565,000.00.
Hence, this present petition for certiorari raising the following grounds:
I.
THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN FINDING THAT THE
PETITIONERS VIOLATED ITS BY-LAWS WHEN SECTION 30 OF THE CORPORATION CODE
AUTHORIZES THE STOCKHOLDERS TO GRANT COMPENSATION TO ITS DIRECTORS.
II.
THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN FINDING THAT THE
PAYMENT OF RATA TO BSP OFFICIALS WHO ARE MEMBERS OF THE PICCI BOARD
VIOLATED ITEM NO. 4 OF NATIONAL COMPENSATION CIRCULAR (NCC) NO. 67 DATED
JANUARY [1], 1992 ISSUED BY THE DEPARTMENT OF BUDGET AND MANAGEMENT (DBM) AS
SAID NCC SPECIFICALLY APPLIES ONLY TO "NATIONAL GOVERNMENT OFFICIALS AND
EMPLOYEES."
III.
THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN DIRECTING THE
AUDITOR TO ENFORCE REFUND OF THE PAYMENTS TO THE PETITIONERS [WHO ARE]
DIRECTORS AS THE PETITIONERS ENJOY THE PRESUMPTION OF GOOD FAITH AND ARE
CONVINCED THAT THEY ARE LEGALLY ENTITLED THERETO IN THE LIGHT OF THE
SUPREME COURT DECISION IN ASSOCIATION OF DEDICATED EMPLOYEES OF THE
PHILIPPINE TOURISM AUTHORITY (ADEPT) VS. COA, 295 SCRA 366. 13

Petitioners contend that since PICCI was incorporated with the Securities and Exchange
Commission (SEC) (SEC Regulation No. 68840) and has no original charter, it should be governed
by Section 30 of the Corporation Code. According to petitioners, their receipt of RATA as directors of
PICCI was sanctioned by PICCIs sole stockholder, BSP (through its own governing body, the
Monetary Board), per MB Resolution No. 15 dated January 5, 1994, as amended by MB Resolution
No. 34 dated January 12, 1994.
Respondent counters that said provision does not apply to petitioners as Section 8 of the PICCI Bylaws provides that the compensation of the members of the PICCI Board of Directors shall be given
only through per diems.
Section 30 of the Corporation Code, which authorizes the stockholders to grant compensation to its
directors, states:
Sec. 30. Compensation of Directors. In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems; Provided, however, that any such compensation (other than per diems) may
be granted to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year.
In construing the said provision, it bears stressing that the directors of a corporation shall not receive
any compensation for being members of the board of directors, except for reasonable per diems.
The two instances where the directors are to be entitled to compensation shall be when it is fixed by
the corporations by-laws or when the stockholders, representing at least a majority of the
outstanding capital stock, vote to grant the same at a regular or special stockholders meeting,
subject to the qualification that, in any of the two situations, the total yearly compensation of
directors, as such directors, shall in no case exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.
Section 8 of the Amended By-Laws of PICCI,14 in consonance with Section 30 of the Corporation
Code, restricted the scope of petitioners compensation by fixing their per diem at P1,000.00:
Sec. 8. Compensation. Directors, as such, shall not receive any salary for their services but shall
receive a per diem of one thousand pesos (P1,000.00) per meeting actually attended; Provided, that
the Board of Directors at a regular and special meeting may increase and decrease, as
circumstances shall warrant, such per diems to be received. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any capacity and receiving
compensation therefor.15
The nomenclature for the compensation of the directors used herein is per diems, and not salary or
any other words of similar import. Thus, petitioners are allowed to receive only per
diems of P1,000.00 for every meeting that they actually attended. However, the Board of Directors
may increase or decrease the amount of per diems, when the prevailing circumstances shall

warrant. No other compensation may be given to them, except only when they serve the corporation
in another capacity.
Petitioners justify their entitlement to P1,500.00 RATA from the PICCI, on the theory that:
[T]he purpose in issuing NCC No. 67 is to ensure uniformity and consistency of actions on claims for
RATA which is granted by law to national government officials and employees to cover expenses
incurred in the discharge or performance of their duties and responsibilities. Moreover, Item 2 of
NCC 67 enumerated the national government officials and employees that are covered by the
Circular, to wit:
[1] Those whose positions are listed under Service Code 18 of the Index of Occupational
Services issued by the Department of Budget and Management (DBM), pursuant to NCC No.
57, except for the positions of the President, Vice-President, Lupon Member and Lupon
Chairman and positions under the Local Executives Group;
[2] Those whose positions are identified as chiefs of division in the Personal Services
Itemization;
[3] Those whose positions are determined by the DBM to be of equivalent rank with the
officials and employees enumerated under Section 2.1 and 2.2 hereof x x x; and
[4] Those who are duly designated by competent authority to perform the full-time duties and
responsibilities, whether or not in concurrent capacity, as Officers-in-Charge for one (1) final
calendar month or more of the positions enumerated in Sections 2.1, 2.2 and 2.3 hereof.
The PICCI is not an originally chartered corporation, but a subsidiary corporation of BSP organized
in accordance with the Corporation Code of the Philippines. The Articles of Incorporation of PICCI
was registered on July 29, 1976 in the Securities and Exchange Commission. As such, PICCI does
not fall within the coverage of NCC No. 67. As a matter of fact, by virtue of P.D. [No.] 520, PICCI is
exempt from the coverage of the civil service law and regulations (and Constitution defining
coverage of civil service as limited to those with original [charter] (TUCP v. NHA, G.R. No. 49677,
May 4, 1089, Article IX-B, Sec. 1). Certainly, if PICCI is not part of the National Government, but a
mere subsidiary of a government-owned and/or controlled corporation (BSP), its officers, and more
importantly, its directors, are not covered by the term "national government officials and employees"
to which NCC No. 67 finds application.
Even the BSP, which is the sole stockholder of PICCI, is not covered by NCC No. 67, not only for the
same reasons stated above but for the reason that it enjoys fiscal and administrative autonomy,
which is defined as the "guarantee of full flexibility to allocate and utilize their resources with the
wisdom and dispatch that their needs require" (Bengzon v. Drilon, 208 SCRA 133).16

DOUBLE COMPENSATION
Respondent maintains that petitioners receipt of RATA from PICCI, in addition to their per
diem of P1,000 per meeting, and another RATA from BSP, violates the rule against double

compensation; that as former officers of the BSP, petitioners Gabriel P. Singson, Araceli E.
Villanueva, Andre Navato, Edgardo P. Zialcita, and Melpin A. Gonzaga were also receiving RATA
from the BSP, in addition to the RATA granted to them as PICCI Directors; that there is double
payment of RATA, since petitioners membership in the PICCI Board is a mere adjunct of their
positions as BSP officials; that double compensation refers to two sets of compensations for two
different offices held concurrently by one officer; and that while there is no general prohibition
against holding two offices which are not incompatible, when an officer accepts a second office, he
can draw the salary attached to such second office only when he is specifically authorized by law
which does not exist in the present case.
In her letter, dated October 14, 1999, to petitioner Araceli E. Villanueva, Corporate Auditor Adelaida
A. Aldovino reiterated her decision disallowing disbursements for RATA of PICCI directors for the
reasons set forth in Notice of Disallowance No. 99-001-101 (96-98). Thus,
Moreover, while the directors are not strictly speaking Officers-in-Charge, but because they are
doing duties in concurrent capacities and are already receiving RATA from their principal office,
Budget Compensation Policy Guideline No. 6, dated September 1, 1982, is applicable.
No. 3.0 of the guideline provides:
3.1 An Official/employee already entitled/granted commutable transportation/representation
allowances and designated by competent authority to perform duties and responsibilities in
concurrent capacity as Officer-in-Charge of another position(s), whether CES or non-CES, whether
or not in the same ministry/bureau/office or agency and entitled to similar benefits/allowances,
whether commutable or reimbursable, except where similar allowances are higher in rates than
those of his regular position, in which case he may be allowed to collect the difference thereof,
provided the period of his temporary stewardship is not less than one month on a reimbursable
basis.
In view of the foregoing, we are reiterating our decision disallowing disbursement for RATA of PICCI
directors for reasons stated in our Notice of Disallowance No. 99-001-01 (96-98).1avvphi1
Further, please be reminded that disallowance not appealed within six (6) months as prescribed
under Section 48, 50 and 51 of PD 1445 shall become final and executory.17
In COA Decision No. 2002-081 dated April 23, 2002, respondent concluded that the payment of
RATA to petitioners violated Item No. 4 of National Compensation Circular (NCC) No. 67, dated
January 1, 1992, issued by the DBM, as the petitioners were already drawing RATA from their
mother agencies and, hence, their receipt of RATA from PICCI was without legal basis and
constituted double compensation of RATA which is prohibited under the Constitution. It also
explained that under the By-Laws of PICCI, the compensation of its directors should be in the form
of per diem and not RATA, and as the By-Laws have the same force and effect of law as the
corporate charter, its directors and officers are under obligation to comply therewith.
Section 8, Article IX-B of the Constitution provides that no elective or appointive public officer or
employee shall receive additional, double or indirect compensation, unless specifically authorized by

law, nor accept without the consent of the Congress, any present emolument, office or title of any
kind from any foreign government. Pensions and gratuities shall not be considered as additional,
double or indirect compensation.
ISSUE: W/n there is double compensation in this case.
HELD: NONE
This provision, however, does not apply to the present case as there was no double
compensation of RATA to the petitioners.
In Leynes v. Commission on Audit,18 the Court clarified that what National Compensation Circular
(NCC) No. 67 seeks to prevent is the dual collection of RATA by a national official from the budgets
of "more than one national agency." In the said case, the interpretation was that NCC No. 67 cannot
be construed as nullifying the power of therein local government units to grant allowances to judges
under the Local Government Code of 1991. Further, NCC No. 67 applies only to the national funds
administered by the DBM, not the local funds of the local government units. Thus,
The pertinent provisions of NCC No. 67 read:
3. Rules and Regulations:
3.1.1 Payment of RATA, whether commutable or reimbursable, shall be in accordance with the rates
prescribed for each of the following officials and employees and those of equivalent ranks, and the
conditions enumerated under the pertinent sections of the General Provisions of the annual General
Appropriations Act (GAA):
xxx

xxx

xxx

4. Funding Source:
In all cases, commutable and reimbursable RATA shall be paid from the amount appropriated for the
purpose and other personal services savings of the agency or project from where the officials and
employees covered under this Circular draw their salaries. No one shall be allowed to collect RATA
from more than one source. (Italics ours)
In construing NCC No. 67, we apply the principle in statutory construction that force and effect
should not be narrowly given to isolated and disjoined clauses of the law but to its spirit, broadly
taking all its provisions together in one rational view. Because a statute is enacted as a whole and
not in parts or sections, that is, one part is as important as the others, the statute should be
construed and given effect as a whole. A provision or section which is unclear by itself may be
clarified by reading and construing it in relation to the whole statute.
Taking NCC No. 67 as a whole then, what it seeks to prevent is the dual collection of RATA by a
national official from the budgets of "more than one national agency." We emphasize that the other
source referred to in the prohibition is another national agency. This can be gleaned from the fact

that the sentence "no one shall be allowed to collect RATA from more than one source" (the
controversial prohibition) immediately follows the sentence that RATA shall be paid from the budget
of the national agency where the concerned national officials and employees draw their salaries. The
fact that the other source is another national agency is supported by RA 7645 (the GAA of 1993)
invoked by respondent COA itself and, in fact, by all subsequent GAAs for that matter, because the
GAAs all essentially provide that (1) the RATA of national officials shall be payable from the budgets
of their respective national agencies and (2) those officials on detail with other national agencies
shall be paid their RATA only from the budget of their parent national agency:
xxx

xxx

xxx

Clearly therefore, the prohibition in NCC No. 67 is only against the dual or multiple collection of
RATA by a national official from the budgets of two or more national agencies. Stated otherwise,
when a national official is on detail with another national agency, he should get his RATA only from
his parent national agency and not from the other national agency he is detailed to. 19 (Italics
supplied.)
Moreover, Section 6 of Republic Act No. 7653 (The New Central Bank Act) defines that the powers
and functions of the BSP shall be exercised by the BSP Monetary Board, which is composed of
seven (7) members appointed by the President of the Philippines for a term of six (6) years. MB
Resolution No. 15,20 dated January 5, 1994, as amended by MB Resolution No. 34, dated January
12, 1994, are valid corporate acts of petitioners that became the bases for granting them additional
monthly RATA of P1,500.00, as members of the Board of Directors of PICCI. The RATA is distinct
from salary (as a form of compensation). Unlike salary which is paid for services rendered, the RATA
is a form of allowance intended to defray expenses deemed unavoidable in the discharge of office.
Hence, the RATA is paid only to certain officials who, by the nature of their offices, incur
representation and transportation expenses.21 Indeed, aside from the RATA that they have been
receiving from the BSP, the grant ofP1,500.00 RATA to each of the petitioners for every board
meeting they attended, in their capacity as members of the Board of Directors of PICCI, in addition
to their P1,000.00 per diem, does not run afoul the constitutional proscription against double
compensation.
Petitioners invoke the ruling of ADEPT v. COA22 whereby the Court took into consideration the good
faith of therein petitioners and, thus, allowed them to retain the incentive benefits they had received
for the year 1992.
Respondent points out that the records of the case do not support petitioners claim of good faith,
because they themselves were the authors of the By-Laws of PICCI which prohibit the receipt of
compensation other than per diems and, therefore, should have been conversant with the
constitutional prohibition on double compensation.
The Court upholds the findings of respondent that petitioners right to compensation as
members of the PICCI Board of Directors is limited only to per diem of P1,000.00 for every
meeting attended, by virtue of the PICCI By-Laws. In the same vein, we also clarify that there
has been no double compensation despite the fact that, apart from the RATA they have been
receiving from the BSP, petitioners have been granted the RATA of P1,500.00 for every board

meeting they attended, in their capacity as members of the Board of Directors of PICCI,
pursuant to MB Resolution No. 1523 dated January 5, 1994, as amended by MB Resolution No.
34 dated January 12, 1994, of the Bangko Sentral ng Pilipinas. In this regard, we take into
consideration the good faith of petitioners.
The ruling in Blaquera, to which the cited case of ADEPT v. COA was consolidated with, is applicable
to the present case as petitioners acted in good faith. The disposition in De Jesus v. Commission on
Audit,24 which cited Blaquera, is instructive:
Nevertheless, our pronouncement in Blaquera v. Alcala25 supports petitioners position on the refund
of the benefits they received. In Blaquera, the officials and employees of several government
departments and agencies were paid incentive benefits which the COA disallowed on the ground
that Administrative Order No. 29 dated 19 January 1993 prohibited payment of these benefits. While
the Court sustained the COA on the disallowance, it nevertheless declared that:
Considering, however, that all the parties here acted in good faith, we cannot countenance the
refund of subject incentive benefits for the year 1992, which amounts the petitioners have already
received. Indeed, no indicia of bad faith can be detected under the attendant facts and
circumstances. The officials and chiefs of offices concerned disbursed such incentive benefits in the
honest belief that the amounts given were due to the recipients and the latter accepted the same
with gratitude, confident that they richly deserve such benefits.
This ruling in Blaquera applies to the instant case. Petitioners here received the additional
allowances and bonuses in good faith under the honest belief that LWUA Board Resolution No. 313
authorized such payment. At the time petitioners received the additional allowances and bonuses,
the Court had not yet decided Baybay Water District [v. Commission on Audit].26 Petitioners had no
knowledge that such payment was without legal basis. Thus, being in good faith, petitioners need
not refund the allowances and bonuses they received but disallowed by the COA. 27
In subsequent cases,28 the Court took into account the good faith of the recipients of the allowances,
bonuses, and other benefits disallowed by respondent and ruled that they need not refund the same.
As petitioners believed in good faith that they are entitled to the RATA of P1,500.00 for every board
meeting they attended, in their capacity as members of the Board of Directors of PICCI, pursuant to
MB Resolution No. 1529dated January 5, 1994, as amended by MB Resolution No. 34 dated January
12, 1994, of the BSP, the Court sees no need for them to refund their RATA respectively, in the total
amount of P1,565,000.00, covering the period from 1996-1998.
WHEREFORE, the petition is DISMISSED. Decision No. 2002-081, dated April 23, 2002, of the
Commission on Audit and its Resolution No. 2003-115, dated July 31, 2003, which denied
petitioners motion for reconsideration thereof and upheld the disallowance of petitioners
Representation and Transportation Allowance (RATA) in the total amount of P1,565,000.00 under
Notice of Disallowance No. 99-001-101 (96-96) dated June 7, 1999, areAFFIRMED WITH
MODIFICATION. Petitioners need not refund the Representation and Transportation Allowance
(RATA) they received pursuant to Monetary Board Resolution No. 15 30 dated January 5, 1994, as
amended by Monetary Board Resolution No. 34 dated January 12, 1994, of the Bangko Sentral ng

Pilipinas granting each of them an additional monthly RATA of P1,500.00, for every meeting
attended, in their capacity as members of the Board of Directors of Philippine International
Convention Center, Inc. (PICCI), or in the total amount ofP1,565,000.00, covering the period from
1996-1998.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice

Republic of the Philippines

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

ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended bylaws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for
a preliminary injunction" against the majority of the members of the Board of Directors and San
Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres
Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde,
Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding

and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended
that according to section 22 of the Corporation Law and Article VIII of the by-laws of the
corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to
the Board of Directors only by the affirmative vote of stockholders representing not less than
2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have
been computed on the basis of the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner contended that the Board acted without
authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all
the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof;
that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to
vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him of his vested right as aforementioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to disqualify
a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and
void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations,
entered into contracts (specifically a management contract) with respondent corporation, which was
allowed because the questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business; that the portion
of the amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws
which requires that "all nominations for election of directors ... shall be submitted in writing to the
Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that individual respondents be made to pay damages, in specified
amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging
that the Secretary of respondent corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain documents enumerated in the request, and that
respondent corporation had been attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)

copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e)
lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M.
Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought cannot
be determined until the issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the records of the corporation
and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial
allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of
Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the
power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961
and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is
determined in relation to the total subscribed capital stock at the time the delegation of said
power is made, not when the Board opts to exercise said delegated power"; that petitioner
has not availed of his intra-corporate remedy for the nullification of the amendment, which is
to secure its repeal by vote of the stockholders representing a majority of the subscribed
capital stock at any regular or special meeting, as provided in Article VIII, section I of the bylaws and section 22 of the Corporation law, hence the, petition is premature; that petitioner is
estopped from questioning the amendments on the ground of lack of authority of the Board. since he
failed, to object to other amendments made on the basis of the same 1961 authorization: that the
power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of
the board should not be interfered with: That the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in
restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the
petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to
respondents. The application for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that in
August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares therein. until
September 1976 when its total holding amounted to 622,987 shares: that in October 1972, the
Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent
(corporation. until its total holdings amounted to P543,959.00 in September 1976; that on January

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

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments
thereof for the reason that he had already obtained the same, the Commission takes
note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of
production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel International,
Inc., until after the hearing on the merits of the principal issues in the above-entitled
case.
This Order is immediately executory upon its approval.

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of "ratification
and confirmation of the amendment to the By-laws", setting such meeting for February 10,
1977. This prompted petitioner to ask respondent Commission for a summary judgment insofar as
the first cause of action is concerned, for the alleged reason that by calling a special stockholders'
meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of
September 18, 1976. The motion for summary judgment was opposed by private respondents.
Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary
Restraining Order", praying that pending the determination of petitioner's application for the issuance
of a preliminary injunction and/or petitioner's motion for summary judgment, a temporary restraining
order be issued, restraining respondents from holding the special stockholder's meeting as
scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed
by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the
time of the filing of the instant petition, the said motion had not yet been scheduled for hearing.
Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's
motion for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that
he intended to run for the position of director of respondent corporation. Thereafter, respondents
filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors
of respondent corporation disqualifying and precluding petitioner from being a candidate for director

unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason
thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and render
ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's irreparable
damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent
Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to
act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have private respondents Andres M.
Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such
violation, and ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as
early as February 4, 1977, the commission acted thereon only on April 25, 1977, when it denied
respondents' motion to dismiss and gave them two (2) days within which to file their answer, and set
the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof,
the following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at
the meeting on March 20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for which the Corporation
has been organized, and ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of
the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17,
1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding,
no action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch
on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon
his rights as stockholder of respondent corporation, and that respondent are acting oppressively
against petitioner, in gross derogation of petitioner's rights to property and due process. He prayed
that this Court direct respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court
or until the Securities and Ex-change Commission acts on the matters complained of in the instant
petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had
been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner
copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for reconsideration of the order denying the
issuance of a temporary restraining order denying the issuance of a temporary restraining order, and
petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders'
meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of
the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for summary
judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null and void
and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings

relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls a
greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in business directly and substantially competing with
the allied businesses of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and
present danger that competitors or antagonistic parties may be elected directors and thereby have
easy and direct access to SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear
and present danger that business competitors, if allowed to become directors, will illegally and
unfairly utilize their direct access to its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve
and protect itself by excluding competitors and antogonistic parties, under the law of selfpreservation, and it should be allowed a wide latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on
May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was,
therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition
has become moot and academic for the reason, among others that the acts of private respondent
sought to be enjoined have reference to the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the
order of respondent Commission, petitioner was allowed to run and be voted for as director; and that
in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed.
Further it was averred that the questions and issues raised by petitioner are pending in the
Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing

on the merits has been had; hence the elevation of these issues before the Supreme Court is
premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court;
(2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to
the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC
Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation,
took into consideration an urgent manifestation filed with the Commission by petitioner on May 3,
1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The
reason given for denial of deferment was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express
their wishes regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has the authority and the competence to act
on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San
Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of
the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2
of the Corporation Law.

I Whether or not amended by-laws are valid is purely a legal question which public interest requires
to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for
an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle
of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of
the amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute
as to what the provisions are and evidence is not necessary to determine whether such amended
by-laws are valid as framed and approved ... "; second: "it is for the interest and guidance of the
public that an immediate and final ruling on the question be made ... "; third: "petitioner was denied
due process by SEC" when "Commissioner de Guzman had openly shown prejudice against
petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws ex-parte and obviously
found the same intrinsically valid; and finally: "to remand the case to SEC would only entail delay
rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the
legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court
should always strive to settle the entire controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citingGayong v. Gayos. 3 To the same effect is the prayer of San
Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and the
rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by the
parties concerned and, more importantly, by this Honorable Court, would have been for naught
because the main question will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for
hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety
and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to decide the
cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would
not be subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the

case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only
a question of law is involved. 8a Because uniformity may be secured through review by a single
Supreme Court, questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were
ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination
or election to the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the
by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal
sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to
the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who have
exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored
to suppress the minority and prevent them from having representation in the Board", at the same
time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided
Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with
the promotion of the corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San Miguel
Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of
the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder under Philippine Law to be voted as
director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or
thru two corporations owned or controlled by him, control over the following shareholdings in San
Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal Robina Corporation
738,647 shares; (c) CFC Corporation 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present date, is represented by

33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner
represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also
contended that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members
of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation
are engaged in businesses directly and substantially competing with the alleged businesses of San
Miguel Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN
MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken,
poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such
dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina
was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex,
excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with
Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because
they "realized the grave dangers to the corporation in the event a competitor gets a board seat in
SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it
by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of

February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the
outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders,
owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against
petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the
clear and present danger that the election of a business competitor to the Board may cause upon
the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore,
is the issue

ISSUE:
whether or not respondent San Miguel Corporation could, as a measure of self- protection,
disqualify a competitor from nomination and election to its Board of Directors.
HELD:
It is recognized by an authorities that 'every corporation has the inherent power to adopt bylaws 'for its internal government, and to regulate the conduct and prescribe the rights and
duties of its members towards itself and among themselves in reference to the management
of its affairs. 12 At common law, the rule was "that the power to make and adopt by-laws
was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is
settled throughout the United States that in the absence of positive legislative provisions limiting it,
every private corporation has this inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its charter or in general law, such power
of self-government being essential to enable the corporation to accomplish the purposes of its
creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in
its by-laws "the qualifications, duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation of which he is a director ... "
InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-law
requiring that persons elected to the Board of Directors must be holders of shares of the paid up
value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of

the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered
to have "parted with his personal right or privilege to regulate the disposition of his property
which he has invested in the capital stock of the corporation, and surrendered it to the will of
the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract,
express or implied, between the corporation and the stockholders is infringed ... by any act of the
former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds
of the subscribed capital stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting minority has only one
right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the
same law, the owners of the majority of the subscribed capital stock may amend or repeal
any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to
be elected director, in the face of the fact that the law at the time such right as stockholder was
acquired contained the prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is
ISSUE:
whether the disqualification of a competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
HELD:

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS

SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors

of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries
thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of
the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of
fair play by doing indirectly through the corporation what he could not do so directly.
He cannot violate rules of fair play by doing indirectly though the corporation what he
could not do so directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can
a director. Human nature is too weak -for this. Take whatever statute provision you
please giving power to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by mere implication the
existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of
the family of such stockholder, on account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be
condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So
it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in many
others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test
that we can apply is as to whether or not the action of the Board is authorized and sanctioned by
law. ... . 22
These principles have been applied by this Court in previous cases. 23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER

INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the power
to make by-laws declaring a person employed in the service of a rival company to be ineligible for
the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid."24 This is based upon the principle
that where the director is so employed in the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law
in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to
add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because
as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation
cannot engage in a business in direct competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a
rival business, the directors entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard the new contract as an offshoot
of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not
reap the fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of
the information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the bylaws was made. Certainly, where two corporations are competitive in a substantial sense, it would

seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his corporation duties above his
personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
directors, officers, employees, agents, nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
thus:
... A bank director has access to a great deal of information concerning the business
and plans of a bank which would likely be injurious to the bank if known to another
bank, and it was reasonable and prudent to enlarge this minimum disqualification to
include any director, officer, employee, agent, nominee, or attorney of any other bank
in California. The Ashkins case, supra, specifically recognizes protection against
rivals and others who might acquire information which might be used against the
interests of the corporation as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney for another bank, in
addition to the direct conflict or potential conflict of interest, there is also the danger
of inadvertent leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and potential misuse and leakage
of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in
any other firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding
office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person cannot
serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of
his position as director of San Miguel Corporation, he would absent himself from meetings at which

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

3. Any person who, being a manufacturer, producer, or processor of any

merchandise or object of commerce or an importer of any merchandise or object of
commerce from any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with any person likewise
engaged in the manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to lawful commerce, or of
increasing the market price in any part of the Philippines, or any such merchandise
or object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter
in free markets. These laws are designed to preserve free and unfettered competition as the rule of
trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they
operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a
well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to control prices to the detriment
of the public. 37 In short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired. 38Further, it
must be considered that the Idea of monopoly is now understood to include a condition produced by
the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can
bring about an illegal situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the same
time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition

between them would constitute violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers which may arise when an
individual simultaneously acts as a director of two or more competing corporations. A
common director of two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to coordinate policies or
to aid one corporation at the expense of another, thereby stifling competition. This situation
has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director
is that theinterlock permits the coordination of policies between nominally
independent firms to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful to both corporations,
some accommodation must result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would injure B without
violating his duty of loyalty to B at the same time he could hardly abstain from voting
without depriving A of his best judgment. If the firms really do compete in the
sense of vying for economic advantage at the expense of the other there can
hardly be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of
men have been able to dominate and control a great number of corporations ... to the detriment of
the small ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most
out of the consumers. Where the two competing firms control a substantial segment of the market
this could lead to collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in
the country win enable the former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups and change varying prices in
order to maximize profits from every market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive
the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then
the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained
in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder
but waived in the case of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The
equal protection clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the view that
a by-law which disqualifies a competition from election to the Board of Directors of another
corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to
the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or
more forces, each possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same
kind is a competitor. Such factors as quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar products to the extent of not
less than 10% of respondent corporation's market for competing products. While We here sustain
the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner
is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing
at which the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders. 48 Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities behind Exchange Commission en banc and its decision shall

be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public
policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was
denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over
a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a
complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes
of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment
in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC;
and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May
1976, with deletions of sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976;
(1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in
Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948
with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign
bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that
as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that
the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and
(4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used
in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of
the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of
the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection.
It is generally held by majority of the courts that where the right is granted by statute to the

stockholder, it is given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other
words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to the detriment of the corporation." 57 But
the "impropriety of purpose such as will defeat enforcement must be set up the corporation
defensively if the Court is to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general
rule that stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal benefit
of officers or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock of
subsidiary corporations which are merely agents or instrumentalities of the holding company, the
legal fiction of distinct corporate entities may be disregarded and the books, papers and documents
of all the corporations may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes,
the records of the parent even though subsidiary was not named as a party. 61 mandamus was
likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof
of sufficient control or dominion by the parent showing the relation of principal or agent or something
similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it owned
a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all the stock of the subsidiary has
been refused on the ground that the stockholder was not within the class of "persons having an
interest."64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect

corporation's subsidiaries' books and records which were in corporation's possession and control in
its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and
directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information for
the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records
of a corporation in order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship of the officers and
directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly subsidiary which are in
respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification is
a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is
to manufacture and market beer. It appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as
a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the
power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in
order to accomplish is purpose as stated in its articles of incorporation, and subject to
the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is done solely for investment
and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or securities
must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than
15% of the voting stock of nay agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of bringing about a
monopoly in any line of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis
supplied.)
40. Power to invest corporate funds. A private corporation has the power to invest
its corporate funds "in any other corporation or business, or for any purpose other
than the main purpose for which it was organized, provide that 'its board of directors
has been so authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting
power on such a propose at a stockholders' meeting called for that purpose,' and
provided further, that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because
the questioned investment is neither contrary to law, morals, public order or public policy. It is a
corporate transaction or contract which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said
this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within
the scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted
the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977
cannot be construed as an admission that respondent corporation had committed an ultra vires act,
considering the common practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and
proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately
to this Court. Unless disqualified in the manner herein provided, the prohibition in the aforementioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on
the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and that
this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They
concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in
the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing
by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and
the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is
hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 126200

August 16, 2001

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a
review of the Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the
same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation engaged in the
manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copper ore/concentrates,
cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan

accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of
Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of
Marinduque Mining's real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and
at Antipolo, Rizal, including the improvements thereon. As of November 20, 1980, the loans
extended by PNB amounted to P4 Billion, exclusive of interest and charges. 1
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the
Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining
mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all
of Marinduque Mining's chattels, as well as assets of whatever kind, nature and description which
Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978.
Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of
interest and charges.2
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to
Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and
DBP all other real and personal properties and other real rights subsequently acquired by
Marinduque Mining.3
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on
July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged
and were declared the highest bidders over the foreclosed real properties, buildings, mining
claims, leasehold rights together with the improvements thereon as well as machineries [sic]
and equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte
for a bid price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at
Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for
P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the foreclosed real
properties together with all the buildings, major machineries & equipment and other
improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were
sold to PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. "10" to "10X"-PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties,
buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were
sold to PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and
P543,040.000.00 respectively (Exhs. "8" to "8-BB", "9" to "90-GGGGGG"-PNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed
personal properties of MMIC, the same were sold to PNB and DBP as the highest bidder in
the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order
to ensure the continued operation of the Nickel refinery plant and to prevent the deterioration
of the assets foreclosed, assigned and transferred to Nonoc Mining and Industrial
Corporation all their rights, interest and participation over the foreclosed properties of MMIC
located at Nonoc Island, Surigao del Norte for an initial consideration of P14,361,000,000.00
(Exh. "13"-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and
transferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the
foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of
P325,800,000.00 (Exh. "14"-PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again
assigned, transferred and conveyed to the National Government thru [sic] the Asset
Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier
assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and
Island Cement Corporation (Exh. "15" & "15-A" PNB/DBP).4
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and
caused to be delivered construction materials and other merchandise from Remington Industrial
Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1,
1984 when Remington filed a complaint for a sum of money and damages against Marinduque
Mining for the value of the unpaid construction materials and other merchandise purchased by
Marinduque Mining, as well as interest, attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint was amended to include PNB and DBP as
co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real
and personal properties, chattels, mining claims, machinery, equipment and other assets of
Marinduque Mining.5
On September 13, 1984, Remington filed a second amended complaint to include as additional
defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the
assignee of all real and personal properties, chattels, machinery, equipment and all other assets of
Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.6
On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining
Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants.
Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and
Island Cement must be treated in law as one and the same entity by disregarding the veil of
corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are
practically owned wholly by defendants PNB and DBP, and managed by their officers, aside
from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were
organized in such a hurry and in such suspicious circumstances by co-defendants PNB and
DBP after the supposed extrajudicial foreclosure of MMIC's assets as to make their

supposed projects assets, machineries and equipment which were originally owned by codefendant MMIC beyond the reach of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of co-defendants
NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the
personnel of co-defendant MMIC such that . . . practically there has only been a change of
name for all legal purpose and intents
3. The places of business not to mention the mining claims and project premises of codefendants NMIC, Maricalum and Island Cement likewise used to be the places of business,
mining claims and project premises of co-defendant MMIC as to make the aforesaid codefendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of codefendants PNB and DBP, and subject to their control and management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being
all corporations created by the government in the pursuit of business ventures should not be
allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x
x MMIC whose operations co-defendants PNB and DBP had highly financed before the
alleged extrajudicial foreclosure of defendant MMIC's assets, machineries and equipment to
the extent that major policies of co-defendant MMIC were being decided upon by codefendants PNB and DBP as major financiers who were represented in its board of directors
forming part of the majority thereof which through the alleged extrajudicial foreclosure
culminated in a complete take-over by co-defendants PNB and DBP bringing about the
organization of their co-defendants NMIC, Maricalum and Island Cement to which were
transferred all the assets, machineries and pieces of equipment of co-defendant MMIC used
in its nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros
Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant
MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers
and rank-and-file workers in the legitimate pursuit of its business activities, invested
considerable time, sweat and private money to supply, among others, co-defendant MMIC
with some of its vital needs for its operation, which co-defendant MMIC during the time of the
transactions material to this case became x x x co-defendants PNB and DBP's
instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation,
by virtue of which it becomes doubly necessary to disregard the corporation fiction that codefendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and
separate entities, when in fact and in law, they should be treated as one and the same at
least as far as plaintiff's transactions with co-defendant MMIC are concerned, so as not to
defeat public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate
issues involving creditors such as plaintiff, a fact which all defendants were as (sic) still are
aware of during all the time material to the transactions subject of this case. 7
On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading
the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted
by the lower court in its Order dated April 29, 1989.

On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of
the Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation,
Island Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum
of P920,755.95, representing the principal obligation, including the stipulated interest as of
June 22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the
amount is fully paid; the sum equivalent to 10% of the amount due as and for attorney's fees;
and to pay the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of
Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC. Petitioner filed a
Motion for Reconsideration, which was denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor
against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the transfer of the properties was
made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of
the corporate veil such that Marinduque Mining and its transferees could be considered as one and
the same corporation. The transferees, therefore, are also liable for the value of Marinduque
Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court of Appeals in its
decision,10 this Court declared:
It is an elementary and fundamental principle of corporation law that a corporation is an
entity separate and distinct from its stockholders and from other corporations to which it may
be connected. However, when the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons or in case of two corporations, merge them into one". (Koppel [Phils.],
Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed.,
pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn,
J.). x x x.
In accordance with the foregoing rule, this Court has disregarded the separate personality of the
corporation where the corporate entity was used to escape liability to third parties. 11 In this case,
however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant
the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due
account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of
Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

It shall be mandatory for government financial institutions, after the lapse of sixty (60) days
from the issuance of this decree, to foreclose the collateral and/or securities for any loan,
credit accommodation, and/or guarantees granted by them whenever the arrearages on
such account, including accrued interest and other charges, amount to at least twenty
percent (20%) of the total outstanding obligations, including interest and other charges, as
appearing in the books of account and/or related records of the financial institution
concerned. This shall be without prejudice to the exercise by the government financial
institution of such rights and/or remedies available to them under their respective contracts
with their debtors, including the right to foreclose on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the
subject properties. The banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19 of
the Civil Code, "Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith." The appellate court,
however, did not point to any fact evidencing bad faith on the part of the Marinduque Mining and its
transferees. Indeed, it skirted the issue entirely by holding that the question of actual fraudulent
intent on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant
because:
As aptly stated by the appellee in its brief, "x x x where the corporations have directors and
officers in common, there may be circumstances under which their interest as officers in one
company may disqualify them in equity from representing both corporations in transactions
between the two. Thus, where one corporation was 'insolvent and indebted to another, it has
been held that the directors of the creditor corporation were disqualified, by reason of selfinterest, from acting as directors of the debtor corporation in the authorization of a mortgage
or deed of trust to the former to secure such indebtedness x x x" (page 105 of the Appellee's
Brief). In the same manner that "x x x when the corporation is insolvent, its directors who are
its creditors can not secure to themselves any advantage or preference over other creditors.
They can not thus take advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right. If they do, equity will set aside the
transaction at the suit of creditors of the corporation or their representatives, without
reference to the question of any actual fraudulent intent on the part of the directors, for the
right of the creditors does not depend upon fraud in fact, but upon the violation of the
fiduciary relation to the directors." x x x (page 106 of the Appellee's Brief)
We also concede that "x x x directors of insolvent corporation, who are creditors of the
company, can not secure to themselves any preference or advantage over other creditors in
the payment of their claims. It is not good morals or good law. The governing body of officers
thereof are charged with the duty of conducting its affairs strictly in the interest of its existing
creditors, and it would be a breach of such trust for them to undertake to give any one of its
members any advantage over any other creditors in securing the payment of his debts in
preference to all others. When validity of these mortgages, to secure debts upon which the
directors were indorsers, was questioned by other creditors of the corporation, they should

have been classed as instruments rendered void by the legal principle which prevents
directors of an insolvent corporation from giving themselves a preference over outside
creditors. x x x" (page 106-107 of the Appellee's Brief.)12
The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one of the
corporations. This rule does not apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the corporations with interlocking directors
(Marinduque Mining and DBP).
The second principle invoked by respondent court involves "directors x x x who are creditors" which
is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of
Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum
and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in
the mining business.13The creation of the three corporations was necessary to manage and operate
the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In
the absence of any entity willing to purchase these assets from the bank, what else would it do with
these properties in the meantime? Sound business practice required that they be utilized for the
purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum
and Island Cement of the premises of Marinduque Mining and the hiring of the latter's officers and
personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the
foreclosure sale, convenience and practicality dictated that the corporations so created occupy the
premises where these assets were found instead of relocating them. No doubt, many of these assets
are heavy equipment and it may have been impossible to move them. The same reasons of
convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining,
Maricalum and Island Cement of Marinduque Mining's personnel to manage and operate the
properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. 14 To
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. 15 In this case, the Court finds that Remington failed
to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in
the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil.
The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid
purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held liable
for the value thereof.

In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced
against DBP. Article 2241 of the Civil Code provides:
ARTICLE 2241. With reference to specific movable property of the debtor, the following
claims or liens shall be preferred:
xxx

xxx

xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in
the possession of the debtor, up to the value of the same; and if the movable has been
resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this
right is not lost by the immobilization of the thing by destination, provided it has not lost its
form, substance and identity, neither is the right lost by the sale of the thing together with
other property for a lump sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the
creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged,
up to the value thereof;
xxx

xxx

xxx

In Barretto vs. Villanueva,16 the Court had occasion to construe Article 2242, governing claims or
liens over specific immovable property. The facts that gave rise to the case were summarized by this
Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the
house and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid
P1,500 in advance, and executed a promissory note for the balance of P17,500.00.
However, the buyer could only pay P5,500 on account of the note, for which reason the
vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was
able to secure a clean certificate of title (No. 32626), and mortgaged the property to
appellant Magdalena C. Barretto, married to Jose C. Baretto, to secure a loan of P30,000.03,
said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the
mortgage in her favor, obtained judgment, and upon its becoming final asked for execution
on 31 July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's
lien" in the amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249
of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back
of Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure
decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro
rata from the proceeds. Our original decision affirmed this order of the Court of First Instance
of Manila.
In its decision upholding the order of the lower court, the Court ratiocinated thus:

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that
constitute an encumbrance on specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to
the same specific real property or real rights, they shall be satisfied pro-rata, after the
payment of the taxes and assessments upon the immovable property or real rights."
Application of the above-quoted provisions to the case at bar would mean that the herein
appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to
share pro-rata with the appellants the proceeds of the foreclosure sale.
xxx

xxx

xxx

As to the point made that the articles of the Civil Code on concurrence and preference of
credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law
shows any such limitation. If we are to interpret this portion of the Code as intended only for
insolvency cases, then other creditor-debtor relationships where there are concurrence of
credits would be left without any rules to govern them, and it would render purposeless the
special laws on insolvency.17
Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes,
speaking for the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical changes introduced by
the Civil Code of the Philippines into the system of priorities among creditors ordained by the
Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific
real property under Article 1923 were to be resolved according to an order of priorities
established by Article 1927, whereby one class of creditors could exclude the creditors of
lower order until the claims of the former were fully satisfied out of the proceeds of the sale of
the real property subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar
absolute preference. All the remaining thirteen classes of preferred creditors under Article
2242 enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to the
amount of the respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment of the taxes and assessments upon the
immovable property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos.
2 to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be
convened, and the import of their claims ascertained. It is thus apparent that the full
application of Articles 2249 and 2242 demands that there must be first some proceeding
where the claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
"The claims or credits enumerated in the two preceding articles shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code Commission, as follows
"The question as to whether the Civil Code and the Insolvency Law can be harmonized is
settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241
and 2242) are to be enforced in accordance with the Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law
for the enforcement of preferences under Article 2242, unless the claimant were enforcing a
credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the other creditors likewise enjoying preference
under Article 2242 can not be ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that the proceeds of the foreclosure sale
be apportioned only between appellant and appellee, is incorrect, and must be reversed.
[Emphasis supplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,18 and in
two cases both entitled Development Bank of the Philippines vs. NLRC. 19
Although Barretto involved specific immovable property, the ruling therein should apply equally in
this case where specific movable property is involved. As the extrajudicial foreclosure instituted by
PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot
claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6,
1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The
original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.
SO ORDERED.
Davide, Jr., C .J ., Puno, Pardo and Ynares-Santiago, JJ ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 145842

June 27, 2008

EDSA SHANGRI-LA HOTEL AND RESORT, INC., RUFO B. COLAYCO, RUFINO L. SAMANIEGO,
KUOK KHOON CHEN, and KUOK KHOON TSEN, petitioners,
vs.
BF CORPORATION, respondent.
G.R. No. 145873

June 27, 2008

CYNTHIA ROXAS-DEL CASTILLO, petitioner,

vs.
BF CORPORATION, respondent.
DECISION
VELASCO, JR., J.:
Before us are these two (2) consolidated petitions for review under Rule 45 to nullify certain
issuances of the Court of Appeals (CA).
In the first petition, docketed as G.R. No. 145842, petitioners Edsa Shangri-la Hotel and Resort, Inc.
(ESHRI), Rufo B. Colayco, Rufino L. Samaniego, Kuok Khoon Chen, and Kuok Khoon Tsen assail
the Decision1 dated November 12, 1999 of the CA in CA-G.R. CV No. 57399, affirming the

Decision2 dated September 23, 1996 of the Regional Trial Court (RTC), Branch 162 in Pasig City in
Civil Case No. 63435 that ordered them to pay jointly and severally respondent BF Corporation (BF)
a sum of money with interests and damages. They also assail the CA Resolution dated October 25,
2000 which, apart from setting aside an earlier Resolution3 of August 13, 1999 granting ESHRI's
application for restitution and damages against bond, affirmed the aforesaid September 23, 1996
RTC Decision.
In the second petition, docketed as G.R. No. 145873, petitioner Cynthia Roxas-del Castillo also
assails the aforementioned CA Decision of November 12, 1999 insofar at it adjudged her jointly and
severally liable with ESHRI, et al. to pay the monetary award decreed in the RTC Decision.
Both petitions stemmed from a construction contract denominated as Agreement for the Execution
of Builder's Work for the EDSA Shangri-la Hotel Project4 that ESHRI and BF executed for the
construction of the EDSA Shangri-la Hotel starting May 1, 1991. Among other things, the contract
stipulated for the payment of the contract price on the basis of the work accomplished as described
in the monthly progress billings. Under this arrangement, BF shall submit a monthly progress billing
to ESHRI which would then re-measure the work accomplished and prepare a Progress Payment
Certificate for that month's progress billing.5
In a memorandum-letter dated August 16, 1991 to BF, ESHRI laid out the collection procedure BF
was to follow, to wit: (1) submission of the progress billing to ESHRI's Engineering Department; (2)
following-up of the preparation of the Progress Payment Certificate with the Head of the Quantity
Surveying Department; and (3) following-up of the release of the payment with one Evelyn San
Pascual. BF adhered to the procedures agreed upon in all its billings for the period from May 1, 1991
to June 30, 1992, submitting for the purpose the required Builders Work Summary, the monthly
progress billings, including an evaluation of the work in accordance with the Project Manager's
Instructions (PMIs) and the detailed valuations contained in the Work Variation Orders (WVOs) for
final re-measurement under the PMIs. BF said that the values of the WVOs were contained in the
progress billings under the section "Change Orders."6
From May 1, 1991 to June 30, 1992, BF submitted a total of 19 progress billings following the
procedure agreed upon. Based on Progress Billing Nos. 1 to 13, ESHRI paid BF PhP
86,501,834.05.7
According to BF, however, ESHRI, for Progress Billing Nos. 14 to 19, did not re-measure the work
done, did not prepare the Progress Payment Certificates, let alone remit payment for the inclusive
periods covered. In this regard, BF claimed having been misled into working continuously on the
project by ESHRI which gave the assurance about the Progress Payment Certificates already being
processed.
After several futile attempts to collect the unpaid billings, BF filed, on July 26, 1993, before the RTC
a suit for a sum of money and damages.
In its defense, ESHRI claimed having overpaid BF for Progress Billing Nos. 1 to 13 and, by way of
counterclaim with damages, asked that BF be ordered to refund the excess payments. ESHRI also
charged BF with incurring delay and turning up with inferior work accomplishment.

The RTC found for BF

On September 23, 1996, the RTC, on the main finding that BF, as plaintiff a quo, is entitled to the
payment of its claim covered by Progress Billing Nos. 14 to 19 and to the retention money
corresponding to Progress Billing Nos. 1 to 11, with interest in both instances, rendered judgment for
BF. The fallo of the RTC Decision reads:
WHEREFORE, defendants [EHSRI], Ru[f]o B. Colayco, Rufino L. Samaniego, Cynthia del
Castillo, Kuok Khoon Chen, and Kuok Khoon Tsen, are jointly and severally hereby ordered
to:
1. Pay plaintiff the sum of P24,780,490.00 representing unpaid construction work
accomplishments under plaintiff's Progress Billings Nos. 14-19;
2. Return to plaintiff the retention sum of P5,810,000.00;
3. Pay legal interest on the amount of P24,780,490.80 representing the construction
work accomplishments under Progress Billings Nos. 14-19 and on the amount of
P5,810,000.00 representing the retention sum from date of demand until their full
Payment;
4. Pay plaintiff P1,000,000.00 as moral damages, P1,000,000.00 as exemplary
damages, P1,000,000.00 as attorney's fees, and cost of the suit.8
According to the RTC, ESHRI's refusal to pay BF's valid claims constituted evident bad faith entitling
BF to moral damages and attorney's fees.
ESHRI subsequently moved for reconsideration, but the motion was denied by the RTC, prompting
ESHRI to appeal to the CA in CA-G.R. CV No. 57399.
Pending the resolution of CA-G.R. CV No. 57399, the following events and/or incidents transpired:
(1) The trial court, by Order dated January 21, 1997, granted BF's motion for execution pending
appeal. ESHRI assailed this order before the CA via a petition for certiorari, docketed as CA-G.R.
SP No. 43187.9 Meanwhile, the branch sheriff garnished from ESHRI's bank account in the
Philippine National Bank (PNB) the amount of PhP 35 million.
(2) On March 7, 1997, the CA issued in CA-G.R. SP No. 43187 a writ of preliminary injunction
enjoining the trial court from carrying out its January 21, 1997 Order upon ESHRI's posting of a PhP
1 million bond. In a supplemental resolution issued on the same day, the CA issued a writ of
preliminary mandatory injunction directing the trial court judge and/or his branch sheriff acting under
him (a) to lift all the garnishments and levy made under the enjoined order of execution pending
appeal; (b) to immediately return the garnished deposits to PNB instead of delivering the same to
ESHRI; and (c) if the garnished deposits have been delivered to BF, the latter shall return the same
to ESHRI's deposit account.

(3) By a Decision dated June 30, 1997 in CA-G.R. SP No. 43187, the CA set aside the trial court's
January 21, 1997 Order. The CA would later deny BF's motion for reconsideration.
(4) Aggrieved, BF filed before this Court a petition for review of the CA Decision, docketed as G.R.
No. 132655.10On August 11, 1998, the Court affirmed the assailed decision of the CA with the
modification that the recovery of ESHRI's garnished deposits shall be against BF's bond. 11
We denied the motions for reconsideration of ESHRI and BF.
(5) Forthwith, ESHRI filed, and the CA by Resolution of August 13, 1999 granted, an application for
restitution or damages against BF's bond. Consequently, BF and Stronghold Insurance Co., Inc., the
bonding company, filed separate motions for reconsideration.
On November 12, 1999, in CA-G.R. CV No. 57399, the CA rendered a Decision resolving (1) the
aforesaid motions of BF and its surety and (2) herein petitioners' appeal from the trial court's
Decision dated September 23, 1996. This November 12, 1999 Decision, finding for BF and now
assailed in these separate recourses, dispositively reads:
WHEREFORE, premises considered, the decision appealed from is AFFIRMED in toto. This
Court's Resolution dated 13 August 1999 is reconsidered and set aside, and defendantsappellants' application for restitution is denied for lack of merit.
SO ORDERED.12
The CA predicated its ruling on the interplay of two main reasons. First, the issues the parties raised
in their respective briefs were, for the most part, factual and evidentiary. Thus, there is no reason to
disturb the case disposition of the RTC, inclusive of its award of damages and attorney's fees and
the reasons underpinning the award. Second, BF had sufficiently established its case by
preponderance of evidence. Part of what it had sufficiently proven relates to ESHRI being remiss in
its obligation to re-measure BF's later work accomplishments and pay the same. On the other hand,
ESHRI had failed to prove the basis of its disclaimer from liability, such as its allegation on the
defective work accomplished by BF.
Apropos ESHRI's entitlement to the remedy of restitution or reparation arising from the execution of
the RTC Decision pending appeal, the CA held that such remedy may peremptorily be allowed only if
the executed judgment is reversed, a situation not obtaining in this case.
Following the denial by the CA, per its Resolution13 dated October 25, 2000, of their motion for
reconsideration, petitioners are now before the Court, petitioner del Castillo opting, however, to file a
separate recourse.
G.R. No. 145842
In G.R. No. 145842, petitioners ESHRI, et al. raise the following issues for our consideration:

I. Whether or not the [CA] committed grave abuse of discretion in disregarding issues of law
raised by petitioners in their appeal [particularly in admitting in evidence photocopies of
Progress Billing Nos. 14 to 19, PMIs and WVOs].
II. Whether or not the [CA] committed grave abuse of discretion in not holding respondent
guilty of delay in the performance of its obligations and, hence, liable for liquidated damages
[in view that respondent is guilty of delay and that its works were defective].
III. Whether or not the [CA] committed grave abuse of discretion in finding petitioners guilty of
malice and evidence bad faith, and in awarding moral and exemplary damages and
attorney's fees to respondent.
IV. Whether or not the [CA] erred in setting aside its Resolution dated August 13, 2000. 14
The petition has no merit.
Prefatorily, it should be stressed that the second and third issues tendered relate to the correctness
of the CA's factual determinations, specifically on whether or not BF was in delay and had come up
with defective works, and whether or not petitioners were guilty of malice and bad faith. It is basic
that in an appeal by certiorari under Rule 45, only questions of law may be presented by the parties
and reviewed by the Court.15 Just as basic is the rule that factual findings of the CA, affirmatory of
that of the trial court, are final and conclusive on the Court and may not be reviewed on appeal,
except for the most compelling of reasons, such as when: (1) the conclusion is grounded on
speculations, surmises, or conjectures; (2) the inference is manifestly mistaken, absurd, or
impossible; (3) there is grave abuse of discretion; (4) the judgment is based on a misapprehension
of facts; (5) the findings of fact are conflicting; (6) such findings are contrary to the admissions of
both parties; and (7) the CA manifestly overlooked certain relevant evidence and undisputed facts,
that, if properly considered, would justify a different conclusion.16
In our review of this case, we find that none of the above exceptions obtains. Accordingly, the factual
findings of the trial court, as affirmed by the CA, that there was delay on the part of ESHRI, that there
was no proof that BF's work was defective, and that petitioners were guilty of malice and bad faith,
ought to be affirmed.
Admissibility of Photocopies of Progress Billing Nos. 14 to 19,
PMIs and WVOs
Petitioners fault the CA, and necessarily the trial court, on the matter of the admission in evidence of
the photocopies of Progress Billing Nos. 14 to 19 and the complementing PMIs and the WVOs.
According to petitioners, BF, before being allowed to adduce in evidence the photocopies adverted
to, ought to have laid the basis for the presentation of the photocopies as secondary evidence,
conformably to the best evidence rule.
Respondent BF, on the other hand, avers having complied with the laying-the-basis requirement.
Defending the action of the courts below in admitting into evidence the photocopies of the
documents aforementioned, BF explained that it could not present the original of the documents

since they were in the possession of ESHRI which refused to hand them over to BF despite
requests.
We agree with BF. The only actual rule that the term "best evidence" denotes is the rule requiring
that the original of a writing must, as a general proposition, be produced17 and secondary evidence
of its contents is not admissible except where the original cannot be had. Rule 130, Section 3 of the
Rules of Court enunciates the best evidence rule:
SEC. 3. Original document must be produced; exceptions. - When the subject of inquiry is
the contents of a document, no evidence shall be admissible other than the original
document itself, except in the following cases:
(a) When the original has been lost or destroyed, or cannot be produced in court,
without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party against
whom the evidence is offered, and the latter fails to produce it after reasonable
notice; (Emphasis added.)
Complementing the above provision is Sec. 6 of Rule 130, which reads:
SEC. 6. When original document is in adverse party's custody or control. - If the document is
in the custody or under control of the adverse party, he must have reasonable notice to
produce it. If after such notice and after satisfactory proof of its existence, he fails to produce
the document, secondary evidence may be presented as in the case of loss.
Secondary evidence of the contents of a written instrument or document refers to evidence other
than the original instrument or document itself.18 A party may present secondary evidence of the
contents of a writing not only when the original is lost or destroyed, but also when it is in the custody
or under the control of the adverse party. In either instance, however, certain explanations must be
given before a party can resort to secondary evidence.
In our view, the trial court correctly allowed the presentation of the photocopied documents in
question as secondary evidence. Any suggestion that BF failed to lay the required basis for
presenting the photocopies of Progress Billing Nos. 14 to 19 instead of their originals has to be
dismissed. The stenographic notes of the following exchanges between Atty. Andres and Atty. Autea,
counsel for BF and ESHRI, respectively, reveal that BF had complied with the requirements:
ATTY. ANDRES:
During the previous hearing of this case, your Honor, likewise, the witness testified
that certain exhibits namely, the Progress Payment Certificates and the Progress
Billings the originals of these documents were transmitted to ESHRI, all the originals
are in the possession of ESHRI since these are internal documents and I am
referring specifically to the Progress Payment Certificates. We requested your
Honor, that in order that plaintiff [BF] be allowed to present secondary original,

that opposing counsel first be given opportunity to present the originals which
are in their possession. May we know if they have brought the originals and
whether they will present the originals in court, Your Honor. (Emphasis added.)
ATTY. AUTEA:
We have already informed our client about the situation, your Honor, that it has been
claimed by plaintiff that some of the originals are in their possession and our client
assured that, they will try to check. Unfortunately, we have not heard from our client,
Your Honor.
Four factual premises are readily deducible from the above exchanges, to wit: (1) the existence of
the original documents which ESHRI had possession of; (2) a request was made on ESHRI to
produce the documents; (3) ESHRI was afforded sufficient time to produce them; and (4) ESHRI was
not inclined to produce them.
Clearly, the circumstances obtaining in this case fall under the exception under Sec. 3(b) of Rule
130. In other words, the conditions sine qua non for the presentation and reception of the
photocopies of the original document as secondary evidence have been met. These are: (1) there is
proof of the original document's execution or existence; (2) there is proof of the cause of the original
document's unavailability; and (3) the offeror is in good faith. 19 While perhaps not on all fours
because it involved a check, what the Court said in Magdayao v. People, is very much apt, thus:
x x x To warrant the admissibility of secondary evidence when the original of a writing is in
the custody or control of the adverse party, Section 6 of Rule 130 provides that the adverse
party must be given reasonable notice, that he fails or refuses to produce the same in court
and that the offeror offers satisfactory proof of its existence.
xxxx
The mere fact that the original of the writing is in the custody or control of the party against
whom it is offered does not warrant the admission of secondary evidence. The offeror must
prove that he has done all in his power to secure the best evidence by giving notice to the
said party to produce the document. The notice may be in the form of a motion for the
production of the original or made in open court in the presence of the adverse party
or via a subpoena duces tecum, provided that the party in custody of the original has
sufficient time to produce the same. When such party has the original of the writing and
does not voluntarily offer to produce it or refuses to produce it, secondary evidence
may be admitted.20 (Emphasis supplied.)
On the Restitution of the Garnished Funds
We now come to the propriety of the restitution of the garnished funds. As petitioners maintain, the
CA effectively, but erroneously, prevented restitution of ESHRI's improperly garnished funds when it
nullified its own August 13, 1999 Resolution in CA-G.R. SP No. 43187. In this regard, petitioners
invite attention to the fact that the restitution of the funds was in accordance with this Court's final

and already executory decision in G.R. No. 132655, implying that ESHRI should be restored to its
own funds without awaiting the final outcome of the main case. For ease of reference, we reproduce
what the appellate court pertinently wrote in its Resolution of August 13, 1999:
BASED ON THE FOREGOING, the Application (for Restitution/Damages against Bond for
Execution Pending Appeal) dated May 12, 1999 filed by [ESHRI] is GRANTED. Accordingly,
the surety of [BF], STRONGHOLD Insurance Co., Inc., is ORDERED to PAY the sum of [PhP
35 million] to [ESHRI] under its SICI Bond. x x x In the event that the bond shall turn out to
be insufficient or the surety (STRONGHOLD) cannot be made liable under its bond, [BF],
being jointly and severally liable under the bond is ORDERED toRETURN the amount of
[PhP 35 million] representing the garnished deposits of the bank account maintained by
[ESHRI] with the [PNB] Shangri-la Plaza Branch, Mandaluyong City. Otherwise, this Court
shall cause the implementation of the Writ of Execution dated April 24, 1998 issued in Civil
Case No. 63435 against both [BF], and/or its surety, STRONGHOLD, in case they should fail
to comply with these directives.
SO ORDERED.21
Petitioners' contention on the restitution angle has no merit, for, as may be recalled, the CA,
simultaneously with the nullification and setting aside of its August 13, 1999 Resolution, affirmed, via
its assailed November 12, 1999 Decision, the RTC Decision of September 23, 1996, the execution
pending appeal of which spawned another dispute between the parties. And as may be recalled
further, the appellate court nullified its August 13, 1999 Resolution on the basis of Sec. 5, Rule 39,
which provides:
Sec. 5. Effect of reversal of executed judgment. - Where the executed judgment is reversed
totally or partially, or annulled, on appeal or otherwise, the trial court may, on motion, issue
such orders of restitution or reparation of damages as equity and justice may warrant under
the circumstances.
On the strength of the aforequoted provision, the appellate court correctly dismissed ESHRI's claim
for restitution of its garnished deposits, the executed appealed RTC Decision in Civil Case No.
63435 having in fact been upheld in toto.
It is true that the Court's Decision of August 11, 1998 in G.R. No. 132655 recognized the validity of
the issuance of the desired restitution order. It bears to emphasize, however, that the CA had since
then decided CA-G.R. CV No. 57399, the main case, on the merits when it affirmed the underlying
RTC Decision in Civil Case No. 63435. This CA Decision on the original and main case effectively
rendered our decision on the incidental procedural matter on restitution moot and academic.
Allowing restitution at this point would not serve any purpose, but only prolong an already protracted
litigation.
G.R. No. 145873
Petitioner Roxas-del Castillo, in her separate petition, excepts from the CA Decision affirming, in its
entirety, the RTC Decision holding her, with the other individual petitioners in G.R. No. 145842, who

were members of the Board of Directors of ESHRI, jointly and severally liable with ESHRI for the
judgment award. She presently contends:
I. The [CA] erred in not declaring that the decision of the trial court adjudging petitioner
personally liable to respondent void for not stating the factual and legal basis for such award.
II. The [CA] erred in not ruling that as former Director, Petitioner cannot be held personally
liable for any alleged breach of a contract entered into by the corporation.
III. The [cA] erred in not ruling that respondent is not entitled to an award of moral damages.
IV. The [CA] erred in holding petitioner personally liable to respondent for exemplary
damages.
V. The [CA] erred in not ruling that respondent is not entitled to any award of attorney's
fees.22
First off, Roxas-del Castillo submits that the RTC decision in question violated the requirements of
due process and of Sec. 14, Article VII of the Constitution that states, "No decision shall be rendered
by any court without expressing therein clearly and distinctly the facts and the law on which it is
based."
Roxas-del Castillo's threshold posture is correct. Indeed, the RTC decision in question, as couched,
does not provide the factual or legal basis for holding her personally liable under the premises. In
fact, only in the dispositive portion of the decision did her solidary liability crop up. And save for her
inclusion as party defendant in the underlying complaint, no reference is made in other pleadings
thus filed as to her liability.
The Court notes that the appellate court, by its affirmatory ruling, effectively recognized the
applicability of the doctrine on piercing the veil of the separate corporate identity. Under the
circumstances of this case, we cannot allow such application. A corporation, upon coming to
existence, is invested by law with a personality separate and distinct from those of the persons
composing it. Ownership by a single or a small group of stockholders of nearly all of the capital stock
of the corporation is not, without more, sufficient to disregard the fiction of separate corporate
personality.23 Thus, obligations incurred by corporate officers, acting as corporate agents, are not
theirs but direct accountabilities of the corporation they represent. Solidary liability on the part of
corporate officers may at times attach, but only under exceptional circumstances, such as when they
act with malice or in bad faith.24Also, in appropriate cases, the veil of corporate fiction shall be
disregarded when the separate juridical personality of a corporation is abused or used to commit
fraud and perpetrate a social injustice, or used as a vehicle to evade obligations. 25 In this case, no
act of malice or like dishonest purpose is ascribed on petitioner Roxas-del Castillo as to warrant the
lifting of the corporate veil.
The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time ESHRI
defaulted in paying BF's monthly progress bill, was still a director, for, before she could be held

personally liable as corporate director, it must be shown that she acted in a manner and under the
circumstances contemplated in Sec. 31 of the Corporation Code, which reads:
Section 31. Directors or trustees who willfully or knowingly vote for or assent to patently
unlawful acts of the corporation or acquire any 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. (Emphasis ours.)
We do not find anything in the testimony of one Crispin Balingit to indicate that Roxas-del Castillo
made any misrepresentation respecting the payment of the bills in question. Balingit, in fact, testified
that the submitted but unpaid billings were still being evaluated. Further, in the said testimony, in no
instance was bad faith imputed on Roxas-del Castillo.
Not lost on the Court are some material dates. As it were, the controversy between the principal
parties started in July 1992 when Roxas-del Castillo no longer sat in the ESHRI Board, a reality BF
does not appear to dispute. In fine, she no longer had any participation in ESHRI's corporate affairs
when what basically is the ESHRI-BF dispute erupted. Familiar and fundamental is the rule that
contracts are binding only among parties to an agreement. Art. 1311 of the Civil Code is clear on this
point:
Article 1311. Contracts take effect only between the parties, their assigns and heirs, except
in cases where the rights and obligations are not transmissible by their nature, or by
stipulation or by provision of law.
In the instant case, Roxas-del Castillo could not plausibly be held liable for breaches of contract
committed by ESHRI nor for the alleged wrongdoings of its governing board or corporate officers
occurring after she severed official ties with the hotel management.
Given the foregoing perspective, the other issues raised by Roxas-del Castillo as to her liability for
moral and exemplary damages and attorney's fees are now moot and academic.
And her other arguments insofar they indirectly impact on the liability of ESHRI need not detain us
any longer for we have sufficiently passed upon those concerns in our review of G.R. No. 145842.
WHEREFORE, the petition in G.R. No. 145842 is DISMISSED, while the petition in G.R. No. 145873
is GRANTED. Accordingly, the appealed Decision dated November 12, 1999 of the CA in CA-G.R.
CV No. 57399 is AFFIRMEDwith MODIFICATION that the petitioner in G.R. No. 145873, Cynthia
Roxas-del Castillo, is absolved from any liability decreed in the RTC Decision dated September 23,
1996 in Civil Case No. 63435, as affirmed by the CA.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 168756

December 7, 2009

SHRIMP SPECIALISTS, INC., Petitioner,

vs.
FUJI-TRIUMPH AGRI-INDUSTRIAL CORPORATION, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 171476

December 7, 2009

FUJI-TRIUMPH AGRI-INDUSTRIAL CORPORATION, Petitioner,

vs.
SHRIMP SPECIALISTS, INC. and EUGENE LIM, Respondents.
DECISION
CARPIO, J.:
The Case

This is a consolidation of two separate petitions. In G.R. No. 168756, Shrimp Specialists, Inc.
(Shrimp Specialists) filed a Petition for Review on Certiorari1 assailing the Court of Appeals
Decision2 dated 28 June 2005 in CA-G.R. CV No. 57420. In the assailed decision, the Court of
Appeals (CA) ordered Shrimps Specialists to pay Fuji-Triumph Agri-Industrial Corporation (Fuji) the
following:
1. the sum of P767,427.00 representing the principal amount for the deliveries made by plaintiff from
June to July 1989 inclusive plus six percent (6%) thereon per annum computed from extrajudicial
demand, February 2, 1990, until the finality of the judgment plus twelve percent (12%) interest
thereon per annum, computed from the finality of this judgment until the amount is fully paid;
the sum of P30,000.00 as reasonable attorneys fees; and
the cost of this suit.3
The CA modified the Regional Trial Courts Decision4 dated 15 April 1997 by dismissing the case
against Eugene Lim, President of Shrimp Specialists.
In G.R. No. 171476, Fuji filed a Petition for Review on Certiorari 5 assailing the CA Resolution dated
26 January 2006 in CA-G.R. CV No. 57420, denying Fujis Motion for Reconsideration of the CA
Decision dated 28 June 2005.
The Facts
Shrimp Specialists and Fuji entered into a Distributorship Agreement, under which Fuji agreed to
supply prawn feeds on credit basis to Shrimp Specialists. The prawn feeds would be used in prawn
farms under Shrimp Specialists technical supervision and management. In 1987, Shrimp Specialists
began purchasing prawn feeds from Fuji and paid for them in the regular course of business. 6
From 3 June 1989 to 24 July 1989, Fuji delivered prawn feeds, and Shrimp Specialists issued 9
postdated checks as payment.7
Shrimp Specialists alleges that it issued a stop-payment order for the checks because it discovered
that earlier deliveries were contaminated with aflatoxin. Shrimp Specialists claims that it verbally
informed Fuji about the contamination and Fuji promised to send stocks of better quality. Shrimp
Specialists states that it continued to purchase prawn feeds from Fuji, but the stocks were still
contaminated with aflatoxin.8
Fuji denies that the feeds were contaminated. Fuji asserts that Shrimp Specialists requested to put
on hold the deposit of the checks due to insufficient funds. Fuji adds that when the checks were
presented for payment, the drawee bank dishonored all the checks due to a stop-payment order.9
In January 1990, Ervin Lim, Fujis Vice-President and owner, and Edward Lim, Shrimp Specialists
Finance Officer, met in Ozamiz City to discuss the unpaid deliveries. After the meeting, both agreed
that Shrimp Specialists would issue another set of checks to cover the ones issued earlier. This
agreement was reduced into writing and signed by both parties on behalf of their corporations. 10 The
agreement reads:
Received from SSI the ff. checks representing full payment of the previous stopped (sic) payment
checks to Fuji as follows:

Ck # 158002 -

P 153,485.40

003 -

153,485.40

004 -

153,485.40

005 -

153,485.40

006 -

153,485.40

To inform in advance in case the above checks cannot be deposited for failure to replace the
defective feeds.
Prepared by: Received by:
(signed) Edward Lim (signed) Ervin Lim11
Fuji states that it accepted the checks in good faith and believed that the account would finally be
paid since Edward Lim assured Ervin Lim of the payment. However, upon presentment of the
replacement checks, these were again dishonored due to another stop-payment order issued by
Shrimp Specialists.12
Shrimp Specialists argues that despite the written agreement, Fuji deposited these checks without
first replacing the defective feeds or at least informing Shrimp Specialists in advance that it would
not replace the defective feeds. Thus, Shrimp Specialists contends that it was constrained to issue
another stop-payment order for these checks.13
Fuji claims that despite repeated demands for payment, Shrimp Specialists failed to comply with its
obligation to make good the replacement checks.14
Fuji filed criminal charges against the officers of Shrimp Specialists who signed the checks for
violation of the Anti-Bouncing Checks Law. The charges were all dismissed. 151avvphi1
On 26 October 1990, Fuji filed a civil complaint for sum of money against Shrimp Specialists and
Eugene Lim. On 15 April 1997, the Regional Trial Court of Quezon City (trial court), Branch 76,
rendered a decision finding Shrimp Specialists and Eugene Lim solidarily liable to pay P767,427
representing the deliveries made from June to July 1989 plus interests. Fuji was also
awarded P30,000 as reasonable attorneys fees and the cost of the suit. 16
Shrimp Specialists and Eugene Lim elevated the case to the CA. On 28 June 2005, the CA rendered
a decision modifying the trial courts decision. The CA affirmed the trial courts decision to hold
Shrimp Specialists liable to pay Fuji P767,427 for the prawn feeds delivered plus interests, P30,000
as attorneys fees and cost of suit. However, the CA absolved Eugene Lim from any liability.
Aggrieved by the decision, both Shrimp Specialists and Fuji elevated the case before this Court.
The Ruling of the Regional Trial Court
In the Decision dated 15 April 1997, the trial court found Shrimp Specialists liable to pay
Fuji P767,427 for the prawn feeds delivered from June to July 1989. The trial court stated that since
Eugene Lim negotiated with Fuji and signed the Distributorship Agreement in his capacity as

President of Shrimp Specialists, Eugene Lim was privy to the agreement and hence, was also
liable.17
After hearing the testimonies of Alphonsus Faigal, Fujis Internal Auditing Division
manager,18 Salvador P. Sequitin, Fujis liaison officer,19 Esteban del Mar, Shrimp Specialists
managing director,20 Jose Marquez, Provincial Fishery Officer of Misamis Occidental and a member
of the International Aquaculture Consultancy (IAC), 21 Joan Maria Antonia Sato, owner of seven
prawn ponds,22 and Edward Lim, Shrimp Specialists' finance officer,23 the trial court made the
following findings:
1. Shrimp Specialists did not submit a proper complaint to Fuji when it found out that the
prawn growers allegedly experienced tremendous losses in their prawn harvest due to the
defective feeds.
2. Shrimp Specialists did not find it necessary to seek representation from Fuji to form part of
the group which conducted the inspection.
3. IACs findings were not reduced into writing as to put in question the veracity of its report.
Jose Marquezs testimony that he was part of the group who conducted the inspection on the
prawn ponds is not a substitute to the absence of a written report by IAC.
4. The alleged inspection was conducted on four prawn ponds only. Prawn ponds are
exposed to the harsh elements of nature. The supply of water, bacterial content, salinity, and
temperature are other factors which may contribute to the high mortality rate of prawns.
5. The inspection was directed on the prawn ponds and not on the questioned feeds itself.
Hence, IACs findings that the feeds were contaminated with aflatoxin when these feeds
were not subjected to examination is without basis.
6. IACs existence as an entity was not duly proven. Fuji disputed the existence of IAC
through a certification issued by the Securities and Exchange Commission certifying that IAC
was not registered as a corporation or partnership. Further, no representative from IAC was
presented during the hearing to testify on its existence, expertise and authenticity of its
findings.24
The trial court ruled that the written agreement signed by Edward Lim and Ervin Lim does not suffice
to convince the court that the feeds delivered by Fuji were defective. The trial court explained that
even if the agreement mentions Fuji as having to replace the defective feeds, this statement is not
tantamount to an express admission of the defective quality of the feeds that were delivered. 25
Citing Article 124926 of the Civil Code of the Philippines, the trial court held that the obligation of
Shrimp Specialists to pay Fuji still subsists because Edward Lim, Fujis finance officer, issued a stoppayment order, hence, the checks were never cashed. 27
The trial court held that Eugene Lim is solidarily liable with Shrimp Specialists. The trial court
reasoned that Eugene Lim negotiated with Fuji and signed the Distributorship Agreement in his
capacity as president of Shrimp Specialists, hence, he is privy to the agreement. 28
The Ruling of the Court of Appeals

In resolving the petition, the CA agreed with the trial court that Shrimp Specialists failed to prove with
certainty that Fuji delivered defective feeds. Based on the records, the inspection and discovery of
the alleged defect in Fuji's prawn feeds were made as early as March 1989 while the feeds subject
of this case were delivered to Shrimp Specialists only from 3 June to 24 July 1989. The CA added
that Shrimp Specialists argument is inconsistent with the delivery receipts where the representative
from Shrimp Specialists acknowledged receipt of the feeds in good order and condition. 29
The CA stated that the findings of the trial court deserve utmost consideration. The CA held that
there was no credible evidence showing that the feeds were contaminated with aflatoxin. No
technical or scientific evidence was shown. In fact, no laboratory tests were conducted. Only four
ponds were inspected and on those occasions, there was no representative from Fuji. 30
The CA declared that the portion in the agreement, which states "to inform in advance in case the
same checks cannot be deposited for failure to replace the defective feeds," is too nebulous to be
taken as an admission on the part of Fuji's representative that the feeds earlier delivered were
defective. The CA doubted if Fuji really acknowledged that its earlier feeds were defective because
the agreement was just to acknowledge receipt of the checks. The qualification was not clear as to
its true import. To be an admission of any breach of warranty, the evidence must be clear and
convincing.31
The CA dismissed the case against Eugene Lim. The CA found that based on a review of the
evidentiary records, there was no reason to pierce the corporate veil. The CA reasoned that the
evidence should be more than just signing on behalf of the corporation because these artificial
entities cannot act except through a natural person. The CA added that there is no evidence that
Eugene Lim and Shrimp Specialists are one and the same and they dealt with Fuji in bad faith or
that Eugene Lim assumed solidary obligation with Shrimp Specialists for any liability which might
arise under the Distributorship Agreement.32
The Issue
In G.R. No. 168576, Shrimp Specialists assigns this error for our consideration: whether the CA
erred in interpreting the provision "to inform in advance in case the same checks cannot be
deposited for failure to replace the defective feeds."
In G.R. No. 171476, Fuji presents this sole issue: whether the CA erred in dismissing the case
against respondent Eugene Lim and freeing him from solidary liability with Shrimp Specialists.
The Ruling of the Court
An Admission must be expressed
in definite and unequivocal language
Shrimp Specialists maintains that the provision "to inform in advance in case the same checks
cannot be deposited for failure to replace the defective feeds" clearly shows that Fuji admitted that
the feeds delivered were defective, otherwise, there would be no reason to include the statement in
an agreement that merely acknowledged receipt of the checks. 33 On the other hand, Fuji asserts that
the statement is too ambiguous to be considered an admission that Fuji delivered defective feeds to
Shrimp Specialists when there is evidence to support the contrary.34
In CMS Logging, Inc. v. Court of Appeals,35 we held:

It is a rule that a statement is not competent as an admission where it does not, under a reasonable
construction, appear to admit or acknowledge the fact which is sought to be proved by it. An
admission or declaration to be competent must have been expressed in definite, certain and
unequivocal language.
As correctly ruled by the CA, the statement "to inform in advance in case the same checks cannot be
deposited for failure to replace the defective feeds" is not expressed in definite, certain and
unequivocal language that Fuji admitted to delivering defective feeds. The CA also ruled that to be
an admission of any breach of warranty, the evidence must be clear and convincing. The CA pointed
out that the inspection and discovery of the alleged defective feeds were made as early as March
1989 while the feeds subject of this case were delivered to Shrimp Specialists only from 3 June to 24
July 1989. Even assuming that Fuji admitted that the feeds delivered were defective, the question of
whether Fuji had replaced the feeds is a factual matter not usually reviewable in a petition filed under
Rule 45.36
A petition for review under Rule 45 of the Rules of Court covers only questions of law. Questions of
fact are not reviewable by this Court because they are final and conclusive especially if borne out by
the record or based on substantial evidence.37 In Paterno v. Paterno,38 the Court explained:
Such questions as whether certain items of evidence should be accorded probative value or weight,
or rejected as feeble or spurious, or whether or not the proofs on one side or the other are clear and
convincing and adequate to establish a proposition in issue, are without doubt questions of fact.
Whether or not the body of proofs presented by a party, weighed and analyzed in relation to contrary
evidence submitted by adverse party, may be said to be strong, clear and convincing; whether or not
certain documents presented by one side should be accorded full faith and credit in the face of
protests as to their spurious character by the other side; whether or not inconsistencies in the body
of proofs of a party are of such gravity as to justify refusing to give said proofs weight all these are
issues of fact. Questions like these are not reviewable by this Court, which, as a rule, confines its
review of cases decided by the Court of Appeals only to questions of law raised in the petition and
therein distinctly set forth.
Whether Fuji delivered defective feeds, or whether the statement is tantamount to an admission that
the feeds delivered were defective, or whether Fuji failed to replace defective feeds, are questions of
fact which necessitate an examination of the probative value of the evidence adduced before the trial
court.
The written agreement signed by Edward Lim and Ervin Lim did not convince the trial and appellate
courts that the feeds supplied by Fuji were defective because evidence to the contrary exists, to wit:
a. No proper complaint was submitted to Fuji when the prawn growers allegedly experienced
tremendous losses;
b. Fuji was not represented in the group which conducted the inspection;
c. The existence of the IAC was not duly proven and its findings were not reduced into
writing;
d. The inspection was conducted on four prawn ponds only, which could be exposed to other
harsh elements of nature; and

e. No inspection was conducted on the prawn feeds itself, hence, the IACs findings that the
feeds were contaminated with aflatoxin is without basis.
The CA pointed out that a representative from Shrimp Specialists even acknowledged receipt of
feeds in good order and condition, hence, Shrimp Specialists argument is contrary to the evidence
on record.
The factual findings of the trial court, when affirmed by the appellate court, are generally binding on
the Supreme Court.39 After a careful review of the records, the Court finds no reason to disturb the
factual findings of the trial court and the appellate court.
Solidary Liability
Fuji claims that the CA erred in dismissing the case against Eugene Lim and freeing him from
solidary liability with Shrimp Specialists to Fuji for the amount of the delivered feeds. 40 Fuji alleges
that Eugene Lim, as President of Shrimp Specialists, was the one who solicited and negotiated with
Fuji for the purchase of prawn feeds. Fuji contends that it was primarily because of Eugene Lims
representation that Fuji entered into the Distributorship Agreement with Shrimp Specialists and
agreed to supply prawn feeds on credit.41
Shrimp Specialists asserts that Fuji has not presented any evidence to show that Eugene Lim acted
in bad faith. Fuji also failed to present any evidence to prove that Eugene Lim had maliciously and
deliberately caused Shrimp Specialists to default on its obligation without any valid reason. Hence,
Eugene Lim cannot be made personally liable for the obligations of Shrimp Specialists. 42
A corporation is vested by law with a personality separate and distinct from the people comprising it.
Ownership by a single or small group of stockholders of nearly all of the capital stock of the
corporation is not by itself a sufficient ground to disregard the separate corporate personality. Thus,
obligations incurred by corporate officers, acting as corporate agents, are direct accountabilities of
the corporation they represent.43 In Uy v. Villanueva,44 the Court explained:
The general rule is that obligations incurred by the corporation, acting through its directors, officers,
and employees, are its sole liabilities. However, solidary liability may be incurred, but only under the
following exceptional circumstances:
1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or
assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in
directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons;
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;
When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation; or
When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.45
In this case, none of these exceptional circumstances is present. In its decision, the trial court failed
to provide a clear ground why Eugene Lim was held solidarily liable with Shrimp Specialists. The trial

court merely stated that Eugene Lim signed on behalf of the Shrimp Specialists as President without
explaining the need to disregard the separate corporate personality. The CA correctly ruled that the
evidence to hold Eugene Lim solidarily liable should be more than just signing on behalf of the
corporation because artificial entities can only act through natural persons. Thus, the CA was correct
in dismissing the case against Eugene Lim.
Wherefore, we DENY both petitions. We AFFIRM the Decision of the Court of Appeals dated 28
June 2005 and the Resolution dated 26 January 2006 in CA-G.R. CV No. 57420.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice