G.R. No.

L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all
other
stockholders
of
the
Balatoc
Mining
Company,
etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E.
RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.
Gibbs
and
McDonough
and
Roman
DeWitt,
Perkins
and
Brady
Ross, Lawrence and Selph for appellee Balatoc Mining Company.

Ozaeta

for
for

appellants.
appellees.

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

committee approached A. W. Beam, then president and general manager of the Benguet Company, to
secure the capital necessary to the development of the Balatoc property. As a result of the negotiations
thus begun, a contract, formally authorized by the management of both companies, was executed on
March 9, 1927, the principal features of which were that the Benguet Company was to proceed with the
development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day,
and with an extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to
erect an appropriate power plant, with the aerial tramlines and such other surface buildings as might be
needed to operate the mine. In return for this it was agreed that the Benguet Company should receive
from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the first
P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had
spent upon the development the sum of P1,417,952.15. In compensation for this work a certificate for six
hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet
Company, and the excess value of the work in the amount of P817,952.15 has been returned to the
Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the value of its shares had increased in the
market from a nominal valuation to more than eleven pesos per share. While the Benguet Company was
pouring its million and a half into the Balatoc property, the arrangements made between the two
companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of
many thousands of the shares of the Balatoc Company. But as soon as the success of the development had
become apparent, he began this litigation in which he has been joined by two others of the eighty
shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to
hold any interest in a mining corporation and that the contract by which the interest here in question was
acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet
Company and the corresponding enrichment of the shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in the attention of the
Philippine Commission was early drawn to the fact that there is no entity in Spanish law exactly
corresponding to the notion of the corporation in English and American law; and in the Philippine Bill,
approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of
Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of
granting of franchises, privileges and concessions. These provisions are found in section 74 and 75 of the
Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August
29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the
law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any
member of a corporation engaged in agriculture or mining and for any corporation organized for any
purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in
mining."
Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine
Commission entered upon the enactment of a general law authorizing the creation of corporations in the
Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation
Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to
introduce the American corporation into the Philippine Islands as the standard commercial entity and to
hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of
codification of American corporate law.

For the purposes general description only, it may be stated that the sociedad anonima is something very
much like the English joint stock company, with features resembling those of both the partnership is
shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is
used in that language to designate other forms of partnership, and in its organization it is constructed
along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes of
loose translation the expression sociedad anonima has not infrequently the other hand, the affinity of this
entity to the American corporation has not escaped notice, and the expression sociedad anonima is now
generally translated by the word corporation. But when the word corporation is used in the sense
of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish
expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device was
adopted in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section
13 of that Act (No. 1459) the words which we have already quoted from section 75 of the Act of
Congress of July 1, 1902 (Philippine Bill); and it is of course obvious that whatever meaning originally
attached to this provision in the Act of Congress, the same significance should be attached to it in section
13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into
Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustments
resulting from the continued co-existence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable",
and giving to the sociedades anonimas previously created in the Islands the option to continue business as
such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the
Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce was to compel commercial
entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt
some form or other of the partnership. To this provision was added another to the effect that
existing sociedades anonimas, which elected to continue their business as such, instead of reforming and
reorganizing under the Corporation Law, should continue to be governed by the laws that were in force
prior to the passage of this Act "in relation to their organization and method of transacting business and to
the rights of members thereof as between themselves, but their relations to the public and public officials
shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902
(Philippine Bill), generally prohibiting corporations engaged in mining and members of such from being
interested in any other corporation engaged in mining, was amended by section 7 of Act No. 3518 of the
Philippine Legislature, approved by Congress March 1, 1929. The change in the law effected by this
amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision
against members of a corporation engaged in agriculture or mining from being interested in other
corporations engaged in agriculture or in mining was so modified as merely to prohibit any such member
from holding more than fifteen per centum of the outstanding capital stock of another such corporation.
Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of an
interest in any other corporation engaged in agriculture or in mining was so modified as to limit the
restriction to corporations organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly
penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to
paragraph (5) of section 13 of the Act. The Philippine Legislature undertook to remedy this situation in

section 3 of Act No. 2792 of the Philippine Legislature, approved on February 18, 1919, but this
provision was declared invalid by this court in Government of the Philippine Islands vs. El Hogar
Filipino (50 Phil., 399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted
substantially the same penal provision in section 21 of Act No. 3518, under a title sufficiently broad to
comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the
Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in
question was made.
This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said
Act as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy,
said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its amendments
not otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos
and by imprisonment for not more than five years, in the discretion of the court. If the violation is
committed by a corporation, the same shall, upon such violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by
order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved
in this controversy. The first is whether the plaintiffs can maintain an action based upon the violation of
law supposedly committed by the Benguet Company in this case. The second is whether, assuming the
first question to be answered in the affirmative, the Benguet Company, which was organized as
a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the
United States, and later by the Philippine Legislature, prohibiting a mining corporation from becoming
interested in another mining corporation. It is obvious that, if the first question be answered in the
negative, it will be unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with
a sole view to the public policy that should control in the granting of mining rights. Furthermore, the
penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by
an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant
Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been
committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the active
inducers of the commission of that wrong. The contract, supposing it to have been unlawful in fact, has
been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the
delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility
of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc
Company is secure in the possession of that improvement, and talk about putting the parties in status quo
ante by restoring the consideration with interest, while the Balatoc Company remains in possession of
what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet
Company in many millions of dollars in favor of individuals who have not the slightest equitable right to
that money in a proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of
the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the

other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would
then have us apply the second paragraph of article 1305 of the Civil Code which declares that an innocent
party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any
promise he may have made. But, supposing that the first hurdle can be safely vaulted, the general remedy
supplied in article 1305 of the Civil Code cannot be invoked where an adequate special remedy is
supplied in a special law. It has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280),
where we refused to apply that article to a case of nullity arising upon a usurious loan. The reason given
for the decision on this point was that the Usury Act, as amended, contains all the provisions necessary
for the effectuation of its purposes, with the result that the remedy given in article 1305 of the Civil Code
is unnecessary. Much more is that idea applicable to the situation now before us, where the special
provisions give ample remedies for the enforcement of the law by action in the name of the Government,
and where no civil wrong has been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own statutes; and it would
seem to be unnecessary to ransack the American decisions for analogies pertinent to the case. We may
observe, however, that the situation involved is not unlike that which has frequently arisen in the United
States under provisions of the National Bank Act prohibiting banks organized under that law from
holding real property. It has been uniformly held that a trust deed or mortgaged conveying property of this
kind to a bank, by way of security, is valid until the transaction is assailed in a direct proceeding instituted
by the Government against the bank, and the illegality of such tenure supplies no basis for an action by
the former private owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews, 98 U. S.,
621; Kerfootvs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction. (South
& Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs.
Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar (19 Porto Rico,
143), for the reason that this case arose under a provision of the Foraker Act, a law analogous to our
Philippine Bill. It appears that the registrar had refused to register two deeds in favor of the Compaia
Azucarera on the ground that the land thereby conveyed was in excess of the area permitted by law to the
company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of the
deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has until the State acts
every power and capacity that any other individual capable of acquiring lands, possesses. The
corporation may exercise every act of ownership over such lands; it may sue in ejectment or
unlawful detainer and it may demand specific performance. It has an absolute title against all the
world except the State after a proper proceeding is begun in a court of law. ... The Attorney
General is the exclusive officer in whom is confided the right to initiate proceedings for escheat
or attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the
infraction of law supposed to have been committed, we forego cny discussion of the further question
whether a sociedad anonima created under Spanish law, such as the Benguet Company, is a corporation
within the meaning of the prohibitory provision already so many times mentioned. That important
question should, in our opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs
against the appellants.
G.R. No. 125469 October 27, 1997

PHILIPPINE
STOCK
EXCHANGE,
INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION
and PUERTO AZUL LAND, INC., respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct general supervision
of the Office of the President, 1 with the immense task of enforcing the Revised Securities Act, and all
other duties assigned to it by pertinent laws. Among its inumerable functions, and one of the most
important, is the supervision of all corporations, partnerships or associations, who are grantees of primary
franchise and/or a license or permit issued by the government to operate in the Philippines. 2 Just how far
this regulatory authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange,
Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court of
Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land,
Inc. to be listed in its stock market, thus paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the
public in order to raise funds allegedly to develop its properties and pay its loans with several banking
institutions. In January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities
and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to
course the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it
filed with the said stock exchange an application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the PSE
received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the
legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort
Complex which PALI claims to be among its assets and that the Ternate Development Corporation,
which is among the stockholders of PALI, likewise appears to have been held and continue to be held in
trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested
PALI's application to be deferred. PALI was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort Complex
were not claimed by PALI as its assets. On the contrary, the resort is actually owned by Fantasia Filipina
Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate
Development Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is not
confined to the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying
that they are also asserting legal and beneficial ownership of other properties titled under the name of
PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission
on Good Government (PCGG) requesting for comments on the letters of the PALI and the Marcoses. On
March 4, 1996, the PSE was informed that the Marcoses received a Temporary Restraining Order on the
same date, enjoining the Marcoses from, among others, "further impeding, obstructing, delaying or
interfering in any manner by or any means with the consideration, processing and approval by the PSE of
the initial public offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge
of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to
reject PALI's application, citing the existence of serious claims, issues and circumstances surrounding
PALI's ownership over its assets that adversely affect the suitability of listing PALI's shares in the stock
exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R.
Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the application of PALI for the
listing of its shares with the PSE, and requesting that the SEC, in the exercise of its supervisory and
regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on
PALI's listing application and institute such measures as are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI
and directing the PSE to file its comments thereto within five days from its receipt and for its authorized
representative to appear for an "inquiry" on the matter. On April 22, 1996, the PSE submitted a letter to
the SEC containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion of
the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and
jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3,
6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors
of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc.,
is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the
PALI shares in the Exchange, without prejudice to its authority to require PALI to
disclose such other material information it deems necessary for the protection of the
investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by
the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in the light of recent developments on the
adverse claim against the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the investing public. In this regard,
PALI is hereby ordered to amend its registration statements filed with the Commission to
incorporate the full disclosure of these material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for
Review (with Application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing
the above mentioned orders of the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER
TO ORDER THE LISTING AND SALE OF SHARES OF PALI
WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY
AND ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID
FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN
CUSTODIA
LEGIS
AND
WHICH
FORM
PART
OF
NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY
PROMULGATED
AND
ITS
IMPLEMENTATION
AND
APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS
CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and
Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and Opposition to Motion to
Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for
Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of
the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to Section 6(j) and
6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised Securities Act, and for the purpose of
ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner
is subject to public respondent's jurisdiction, regulation and control. Accepting the argument that the
public respondent has the authority merely to supervise or regulate, would amount to serious
consequences, considering that the petitioner is a stock exchange whose business is impressed with public
interest. Abuse is not remote if the public respondent is left without any system of control. If the
securities act vested the public respondent with jurisdiction and control over all corporations; the power to
authorize the establishment of stock exchanges; the right to supervise and regulate the same; and the
power to alter and supplement rules of the exchange in the listing or delisting of securities, then the law
certainly granted to the public respondent the plenary authority over the petitioner; and the power of
review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing, affirming the
SEC's ruling to the effect that:

. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in
disapproving the application of PALI for listing of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of shares,
PSE has failed to justify why it acted differently on the application of PALI, as compared
to the IPOs of other companies similarly situated that were allowed listing in the
Exchange;
3. It appears that the claims and issues on the title to PALI's properties were even less
serious than the claims against the assets of the other companies in that, the assertions of
the Marcoses that they are owners of the disputed properties were not substantiated
enough to overcome the strength of a title to properties issued under the Torrens System
as evidence of ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify
PALI's ownership over the disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import of PSE's decision in
denying PALI's application is that it would be PALI, not the Marcoses, that must go to
court to prove the legality of its ownership on these properties before its shares can be
listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not
inspire belief. The point is, the PALI properties are now titled. A property losses its public character the
moment it is covered by a title. As a matter of fact, the titles have long been settled by a final judgment;
and the final decree having been registered, they can no longer be re-opened considering that the one year
period has already passed. Lastly, the determination of what standard to apply in allowing PALI's
application for listing, whether the discretion method or the system of public disclosure adhered to by the
SEC, should be addressed to the Securities Commission, it being the government agency that exercises
both supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for Review
on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI
filed its Comment to the petition on October 17, 1996. On the same date, the PCGG filed a Motion for
Leave to file a Petition for Intervention. This was followed up by the PCGG's Petition for Intervention on
October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office of the
Solicitor General, representing the SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG's motion for leave to file petition for intervention, PALI filed
its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI
(October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list
the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC
over stock exchanges are more limited as compared to its authority over ordinary corporations. In

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

These provisions, read together with the general grant of jurisdiction, and right of supervision and control
over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in the
supervision of the affairs of stock exchanges so that the interests of the investing public may be fully
safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's
challenged control authority over the petitioner PSE even as it provides that "the Commission shall have
absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are
the grantees of primary franchises and/or a license or permit issued by the government to operate in the
Philippines. . ." The SEC's regulatory authority over private corporations encompasses a wide margin of
areas, touching nearly all of a corporation's concerns. This authority springs from the fact that a
corporation owes its existence to the concession of its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SEC's express power to insure fair dealing
in securities traded upon a stock exchange or to ensure the fair administration of such exchange. 7 It is,
likewise, observed that the principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities may be encouraged
and protected, and their activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny
the application for listing in the stock exchange of the private respondent PALI. The SEC's action was
affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares
of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC's
mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the
sale and disposition of securities in the country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public respondent to review
petitioner's denial of the listing. Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the economy moves on the basis of
the rise and fall of stocks being traded. By its economic power, the petitioner certainly
can dictate which and how many users are allowed to sell securities thru the facilities of a
stock exchange, if allowed to interpret its own rules liberally as it may please. Petitioner
can either allow or deny the entry to the market of securities. To repeat, the monopoly,
unless accompanied by control, becomes subject to abuse; hence, considering public
interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised
Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious
responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise
vested in some other government office. 10
This is not to say, however, that the PSE's management prerogatives are under the absolute control of the
SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its proposed
and duly approved business. One of the PSE's main concerns, as such, is still the generation of profit for
its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue

and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons,
and to perform all other legal acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed corporate name,
and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional
immunities and perquisites appropriate to such a body. 11 As to its corporate and management decisions,
therefore, the state will generally not interfere with the same. Questions of policy and of management are
left to the honest decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board of directors. The board is the business
manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to
reverse the PSE's decision in matters of application for listing in the market, the SEC may exercise such
power only if the PSE's judgment is attended by bad faith. In Board of Liquidators vs. Kalaw, 13 it was
held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some
motive or interest of ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered important facts,
which, in the general scheme, brings to serious question the qualification of PALI to sell its shares to the
public through the stock exchange. During the time for receiving objections to the application, the PSE
heard from the representative of the late President Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the Marcos estate. In time, the PCGG confirmed this
claim. In fact, an order of sequestration has been issued covering the properties of PALI, and suit for
reconveyance to the state has been filed in the Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the
private respondent PALI, in only a short span of time, are not yet explained to the Court, but it is clear
that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer. The
petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and
effective protection to the investing public against fraudulent representations, or false promises, and the
imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to
legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was designed not
only to provide investors with adequate information upon which to base their decisions to
buy and sell securities, but also to protect legitimate business seeking to obtain capital
through honest presentation against competition from crooked promoters and to prevent
fraud in the sale of securities. (Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses
and fraudulent transactions, merely by requirement of that their details be revealed; (2)
placing the market during the early stages of the offering of a security a body of
information, which operating indirectly through investment services and expert investors,
will tend to produce a more accurate appraisal of a security, . . . Thus, the Commission
may refuse to permit a registration statement to become effective if it appears on its face

to be incomplete or inaccurate in any material respect, and empower the Commission to

issue a stop order suspending the effectiveness of any registration statement which is
found to include any untrue statement of a material fact or to omit to state any material
fact required to be stated therein or necessary to make the statements therein not
misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the
right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who
choose to transact through its facilities. It was reasonable for the PSE, therefore, to exercise its judgment
in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and
public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a thing of the past,
and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no
moment. At this juncture, there is the claim that the properties were owned by TDC and MSDC and were
transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the
claim of the Marcoses that such properties belong to the Marcos estate, and were held only in trust by
Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and forest
reserves, and therefore beyond private dominion. If any of these claims is established to be true, the
certificates of title over the subject properties now held by PALI map be disregarded, as it is an
established rule that a registration of a certificate of title does not confer ownership over the properties
described therein to the person named as owner. The inscription in the registry, to be effective, must be
made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who
takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the application of
PALI, the true ownership of the properties of PALI need not be determined as an absolute fact. What is
material is that the uncertainty of the properties' ownership and alienability exists, and this puts to
question the qualification of PALI's public offering. In sum, the Court finds that the SEC had acted
arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the
private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporation
entity, whose business judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and sale of
securities in the SEC is not for the Court to determine, but is left to the sound discretion of the Securities
and Exchange Commission. In mandating the SEC to administer the Revised Securities Act, and in
performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof,
gives the SEC the power to promulgate such rules and regulations as it may consider appropriate in the
public interest for the enforcement of the said laws. The second paragraph of Section 4 of the said law, on
the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless registered in accordance with the rules
and regulations that shall be promulgated in the public interest and for the protection of investors by the
Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory
agency, has supervision and control over all corporations and over the securities market as a whole, and
as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory
authority, the SEC has manifested that it has adopted the policy of "full material disclosure" where all
companies, listed or applying for listing, are required to divulge truthfully and accurately, all material
information about themselves and the securities they sell, for the protection of the investing public, and

under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or purchase of its securities. 15 While the
employment of this policy is recognized and sanctioned by the laws, nonetheless, the Revised Securities
Act sets substantial and procedural standards which a proposed issuer of securities must
satisfy.16 Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the
Rejection of the registration of a security:
The Commission may reject a registration statement and refuse to issue a permit to
sell the securities included in such registration statement if it finds that
(1) The registration statement is on its face incomplete or inaccurate in any material
respect or includes any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein not
misleading; or
(2) The issuer or registrant
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of this Act, or
the rules promulgated pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and
conditions that the Commission may, in the public interest and for the
protection of investors, impose before the security can be registered;
(iv) has been engaged or is engaged or is about to engage in fraudulent
transaction;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law or is engaged in
a business that is illegal or contrary to government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to be based on
sound business principles;
(4) An officer, member of the board of directors, or principal stockholder of the issuer is
disqualified to be such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the Commission that the
sale of its security would not work to the prejudice of the public interest or as a fraud
upon the purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and
issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the
issuer, to be determined by the Securities and Exchange Commission. This measure was meant to protect
the interests of the investing public against fraudulent and worthless securities, and the SEC is mandated
by law to safeguard these interests, following the policies and rules therefore provided. The absolute

reliance on the full disclosure method in the registration of securities is, therefore, untenable. As it is, the
Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the
propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the
PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the
effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do so. However, the SEC must recognize and
implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot
be amended or supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection, discounting, therefore,
any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the
listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this
case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for
Review on Certiorari. The Decisions of the Court of Appeals and the Securities and Exchange
Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby REVERSED and SET
ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock
Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED.
[G.R. Nos. 116124-25. November 22, 2000]
BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and GENERAL
CREDIT CORPORATION,respondents.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review is the consolidated decision of the Court of Appeals dated July 7,
1994, which reversed the separate decisions of the Regional Trial Court of Pasig City and the Regional
Trial Court of Quezon City in two cases between petitioner Reynoso and respondent General Credit
Corporation (GCC).
Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, CCC), a financing and
investment firm, decided to organize franchise companies in different parts of the country, wherein it
shall hold thirty percent (30%) equity. Employees of the CCC were designated as resident managers of
the franchise companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident manager of
the franchise company in Quezon City, known as the Commercial Credit Corporation of Quezon City
(hereinafter, CCC-QC).
CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the
management and full control of the business activities of the former. Under the contract, CCC-QC shall
sell, discount and/or assign its receivables to CCC. Subsequently, however, this discounting arrangement
was discontinued pursuant to the so-called DOSRI Rule, prohibiting the lending of funds by
corporations to its directors, officers, stockholders and other persons with related interests therein.
On account of the new restrictions imposed by the Central Bank policy by virtue of the DOSRI Rule,
CCC decided to form CCC Equity Corporation, (hereinafter, CCC-Equity), a wholly-owned subsidiary,

to which CCC transferred its thirty (30%) percent equity in CCC-QC, together with two seats in the
latters Board of Directors.
Under the new set-up, several officials of Commercial Credit Corporation, including petitioner Reynoso,
became employees of CCC-Equity. While petitioner continued to be the Resident Manager of CCC-QC,
he drew his salaries and allowances from CCC-Equity. Furthermore, although an employee of CCCEquity, petitioner, as well as all employees of CCC-QC, became qualified members of the Commercial
Credit Corporation Employees Pension Plan.
As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and supervised its
employees. The business activities of CCC-QC pertain to the acceptance of funds from depositors who
are issued interest-bearing promissory notes. The amounts deposited are then loaned out to various
borrowers. Petitioner, in order to boost the business activities of CCC-QC, deposited his personal funds
in the company. In return, CCC-QC issued to him its interest-bearing promissory notes.
On August 15, 1980, a complaint for sum of money with preliminary attachment,[1] docketed as Civil
Case No. Q-30583, was instituted in the then Court of First Instance of Rizal by CCC-QC against
petitioner, who had in the meantime been dismissed from his employment by CCC-Equity. The
complaint was subsequently amended in order to include Hidelita Nuval, petitioners wife, as a party
defendant.[2] The complaint alleged that petitioner embezzled the funds of CCC-QC amounting to
P1,300,593.11. Out of this amount, at least P630,000.00 was used for the purchase of a house and lot
located at No. 12 Macopa Street, Valle Verde I, Pasig City. The property was mortgaged to CCC, and
was later foreclosed.
In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and asserted that the
sum of P1,300,593.11 represented his money placements in CCC-QC, as shown by twenty-three (23)
checks which he issued to the said company.[3]
The case was subsequently transferred to the Regional Trial Court of Quezon City, Branch 86, pursuant to
the Judiciary Reorganization Act of 1980.
On January 14, 1985, the trial court rendered its decision, the decretal portion of which states:
Premises considered, the Court finds the complaint without merit. Accordingly, said complaint is hereby
DISMISSED.
By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation, humiliation and mental
anguish.
On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is hereby ordered:
a)
to pay defendant the sum of P185,000.00 plus 14% interest per annum from October 2, 1980 until
fully paid;
b)
to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per annum from June 24,
1981, the date of filing of Amended Answer, until fully paid; from this amount may be deducted the
remaining obligation of defendant under the promissory note of October 24, 1977, in the sum
of P9,738.00 plus penalty at the rate of 1% per month from December 24, 1977 until fully paid;
c)

to pay defendants P200,000.00 as moral damages;

d)

to pay defendants P100,000.00 as exemplary damages;

e)

to pay defendants P25,000.00 as and for attorney's fees; plus costs of the suit.

SO ORDERED.
Both parties appealed to the then Intermediate Appellate Court. The appeal of Commercial Credit
Corporation of Quezon City was dismissed for failure to pay docket fees. Petitioner, on the other hand,
withdrew his appeal.
Hence, the decision became final and, accordingly, a Writ of Execution was issued on July 24,
1989.[4] However, the judgment remained unsatisfied,[5] prompting petitioner to file a Motion for Alias
Writ of Execution, Examination of Judgment Debtor, and to Bring Financial Records for Examination to
Court. CCC-QC filed an Opposition to petitioners motion,[6] alleging that the possession of its premises
and records had been taken over by CCC.
Meanwhile, in 1983, CCC became known as the General Credit Corporation.
On November 22, 1991, the Regional Trial Court of Quezon City issued an Order directing General
Credit Corporation to file its comment on petitioners motion for alias writ of execution. [7] General Credit
Corporation filed a Special Appearance and Opposition on December 2, 1991,[8]alleging that it was not a
party to the case, and therefore petitioner should direct his claim against CCC-QC and not General Credit
Corporation. Petitioner filed his reply,[9] stating that the CCC-QC is an adjunct instrumentality, conduit
and agency of CCC. Furthermore, petitioner invoked the decision of the Securities and Exchange
Commission in SEC Case No. 2581, entitled, Avelina G. Ramoso, et al., Petitioner versus General
Credit Corp., et al., Respondents, where it was declared that General Credit Corporation, CCC-Equity
and other franchised companies including CCC-QC were declared as one corporation.
On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of an alias writ of
execution.[10] On December 20, 1991, General Credit Corporation filed an Omnibus Motion,[11] alleging
that SEC Case No. 2581 was still pending appeal, and maintaining that the levy on properties of the
General Credit Corporation by the deputy sheriff of the court was erroneous.
In his Opposition to the Omnibus Motion, petitioner insisted that General Credit Corporation is just the
new name of Commercial Credit Corporation; hence, General Credit Corporation and Commercial Credit
Corporation should be treated as one and the same entity.
On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus Motion.[12] On
March 5, 1992, it issued an Order directing the issuance of an alias writ of execution.[13]
Previously, on February 21, 1992, General Credit Corporation instituted a complaint before the Regional
Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C. Tanangco, in his capacity as Deputy
Sheriff of Quezon City,[14] docketed as Civil Case No. 61777, praying that the levy on its parcel of land
located in Pasig, Metro Manila and covered by Transfer Certificate of Title No. 29940 be declared null
and void, and that defendant sheriff be enjoined from consolidating ownership over the land and from
further levying on other properties of General Credit Corporation to answer for any liability under the
decision in Civil Case No. Q-30583.
The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining order. Thus,
General Credit Corporation instituted two (2) petitions for certiorari with the Court of Appeals, docketed
as CA-G.R. SP No. 27518[15] and CA-G.R. SP No. 27683. These cases were later consolidated.
On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated cases, the dispositive
portion of which reads:
WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal to issue a
restraining order as having been rendered moot by our Resolution of 7 April 1992 which, by way of

injunctive relief, provided that "the respondents and their representatives are hereby enjoined from
conducting an auction sale (on execution) of petitioner's properties as well as initiating similar acts of
levying (upon) and selling on execution other properties of said petitioner". The injunction thus granted,
as modified by the words in parenthesis, shall remain in force until Civil Case No. 61777 shall have been
finally terminated.
In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET ASIDE, for
having been issued in excess of jurisdiction, the Order of 13 February 1992 in Civil Case No. Q-30583 as
well as any other order or process through which the petitioner is made liable under the judgment in said
Civil Case No. Q-30583.
No damages and no costs.
SO ORDERED.[16]
Hence, this petition for review anchored on the following arguments:
1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683 WHEN IT
NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND OTHER ORDERS OR
PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL COURT OF QUEZON CITY THROUGH
WHICH GENERAL CREDIT CORPORATION IS MADE LIABLE UNDER THE JUDGMENT THAT
WAS RENDERED IN CIVIL CASE NO. Q-30583.
2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518 WHEN IT
ENJOINED THE AUCTION SALE ON EXECUTION OF THE PROPERTIES OF GENERAL CREDIT
CORPORATION AS WELL AS INITIATING SIMILAR ACTS OF LEVYING UPON AND SELLING
ON EXECUTION OF OTHER PROPERTIES OF GENERAL CREDIT CORPORATION.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL CREDIT
CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-30583, INSTEAD OF, DECLARING
THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY IS THE ALTER EGO,
INSTRUMENTALITY, CONDUIT OR ADJUNCT OF COMMERCIAL CREDIT CORPORATION
AND ITS SUCCESSOR GENERAL CREDIT CORPORATION.
At the outset, it must be stressed that there is no longer any controversy over petitioners claims against
his former employer, CCC-QC, inasmuch as the decision in Civil Case No. Q-30583 of the Regional Trial
Court of Quezon City has long become final and executory. The only issue, therefore, to be resolved in
the instant petition is whether or not the judgment in favor of petitioner may be executed against
respondent General Credit Corporation. The latter contends that it is a corporation separate and distinct
from CCC-QC and, therefore, its properties may not be levied upon to satisfy the monetary judgment in
favor of petitioner. In short, respondent raises corporate fiction as its defense. Hence, we are necessarily
called upon to apply the doctrine of piercing the veil of corporate entity in order to determine if General
Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-QC.
The petition is impressed with merit.
A corporation is an artificial being created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incident to its existence.[17] It is an
artificial being invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related.[18] It was evolved to
make possible the aggregation and assembling of huge amounts of capital upon which big business
depends. It also has the advantage of non-dependence on the lives of those who compose it even as it
enjoys certain rights and conducts activities of natural persons.

Precisely because the corporation is such a prevalent and dominating factor in the business life of the
country, the law has to look carefully into the exercise of powers by these artificial persons it has created.
Any piercing of the corporate veil has to be done with caution. However, the Court will not hesitate to
use its supervisory and adjudicative powers where the corporate fiction is used as an unfair device to
achieve an inequitable result, defraud creditors, evade contracts and obligations, or to shield it from the
effects of a court decision. The corporate fiction has to be disregarded when necessary in the interest of
justice.
In First Philippine International Bank v. Court of Appeals, et al.,[19] we held:
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Also in the above-cited case, we stated that this Court has pierced the veil of corporate fiction in
numerous cases where it was used, among others, to avoid a judgment credit;[20] to avoid inclusion of
corporate assets as part of the estate of a decedent;[21] to avoid liability arising from debt;[22] when made
use of as a shield to perpetrate fraud and/or confuse legitimate issues; [23] or to promote unfair objectives
or otherwise to shield them.[24]
In the appealed judgment, the Court of Appeals sustained respondents arguments of separateness and its
character as a different corporation which is a non-party or stranger to this case.
The defense of separateness will be disregarded where the business affairs of a subsidiary corporation are
so controlled by the mother corporation to the extent that it becomes an instrument or agent of its
parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the
veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.[25]
We stated in Tomas Lao Construction v. National Labor Relations Commission,[26] that the legal fiction of
a corporation being a judicial entity with a distinct and separate personality was envisaged for
convenience and to serve justice. Therefore, it should not be used as a subterfuge to commit injustice and
circumvent the law.
Precisely for the above reasons, we grant the instant petition.
It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation was intended
to publicly identify it as a component of the CCC group of companies engaged in one and the same
business, i.e., investment and financing. Aside from CCC-Quezon City, other franchise companies were
organized such as CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary
corporations as what was done here is usually resorted to for the aggrupation of capital, the ability to
cover more territory and population, the decentralization of activities best decentralized, and the securing
of other legitimate advantages. But when the mother corporation and its subsidiary cease to act in good
faith and honest business judgment, when the corporate device is used by the parent to avoid its liability
for legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate fraud or
promote injustice, the law steps in to remedy the problem. When that happens, the corporate character is
not necessarily abrogated. It continues for legitimate objectives. However, it is pierced in order to
remedy injustice, such as that inflicted in this case.

Factually and legally, the CCC had dominant control of the business operations of CCC-QC. The
exclusive management contract insured that CCC-QC would be managed and controlled by CCC and
would not deviate from the commands of the mother corporation. In addition to the exclusive
management contract, CCC appointed its own employee, petitioner, as the resident manager of CCC-QC.
Petitioners designation as resident manager implies that he was placed in CCC-QC by a superior
authority. In fact, even after his assignment to the subsidiary corporation, petitioner continued to receive
his salaries, allowances, and benefits from CCC, which later became respondent General Credit
Corporation. Not only that. Petitioner and the other permanent employees of CCC-QC were qualified
members and participants of the Employees Pension Plan of CCC.
There are other indications in the record which attest to the applicability of the identity rule in this case,
namely: the unity of interests, management, and control; the transfer of funds to suit their individual
corporate conveniences; and the dominance of policy and practice by the mother corporation insure that
CCC-QC was an instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line of business
involving a single transaction process. Under their discounting arrangements, CCC financed the
operations of CCC-QC. The subsidiary sold, discounted, or assigned its accounts receivables to CCC.
The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971, shows the pervasive
and intensive auditing function of CCC over CCC-QC.[27] The two corporations also shared the same
office space. CCC-QC had no office of its own.
The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by the directorrepresentative of CCC. The lawyers who filed the complaint and amended complaint were all in-house
lawyers of CCC.
The challenged decision of the Court of Appeals states that CCC, now General Credit Corporation, is not
a formal party in the case. The reason for this is that the complaint was filed by CCC-QC against
petitioner. The choice of parties was with CCC-QC. The judgment award in this case arose from the
counterclaim which petitioner set up against CCC-QC.
The circumstances which led to the filing of the aforesaid complaint are quite revealing. As narrated
above, the discounting agreements through which CCC controlled the finances of its subordinates became
unlawful when Central Bank adopted the DOSRI prohibitions. Under this rule the directors, officers, and
stockholders are prohibited from borrowing from their company. Instead of adhering to the letter and
spirit of the regulations by avoiding DOSRI loans altogether, CCC used the corporate device to continue
the prohibited practice. CCC organized still another corporation, the CCC-Equity Corporation. However,
as a wholly owned subsidiary, CCC-Equity was in fact only another name for CCC. Key officials of
CCC, including the resident managers of subsidiary corporations, were appointed to positions in CCCEquity.
In order to circumvent the Central Banks disapproval of CCC-QCs mode of reducing its DOSRI lender
accounts and its directive to follow Central Bank requirements, resident managers, including petitioner,
were told to observe a pseudo-compliance with the phasing out orders. For his unwillingness to
satisfactorily conform to these directives and his reluctance to resort to illegal practices, petitioner earned
the ire of his employers. Eventually, his services were terminated, and criminal and civil cases were filed
against him.
Petitioner issued twenty-three checks as money placements with CCC-QC because of difficulties faced by
the firm in implementing the required phase-out program. Funds from his current account in the Far East
Bank and Trust Company were transferred to CCC-QC. These monies were alleged in the criminal

complaints against him as having been stolen. Complaints for qualified theft and estafa were brought by
CCC-QC against petitioner. These criminal cases were later dismissed. Similarly, the civil complaint
which was filed with the Court of First Instance of Pasig and later transferred to the Regional Trial Court
of Quezon City was dismissed, but his counterclaims were granted.
Faced with the financial obligations which CCC-QC had to satisfy, the mother firm closed CCC-QC, in
obvious fraud of its creditors. CCC-QC, instead of opposing its closure, cooperated in its own
demise. Conveniently, CCC-QC stated in its opposition to the motion for alias writ of execution that all
its properties and assets had been transferred and taken over by CCC.
Under the foregoing circumstances, the contention of respondent General Credit Corporation, the new
name of CCC, that the corporate fiction should be appreciated in its favor is without merit.
Paraphrasing the ruling in Claparols v. Court of Industrial Relations,[28] reiterated in Concept Builders
Inc. v. National Labor Relations,[29] it is very obvious that respondent seeks the protective shield of a
corporate fiction whose veil the present case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation of its employees.
If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment debt and work an
injustice. The decision raised to us for review is an invitation to multiplicity of litigation. As we stated
in Islamic Directorate vs. Court of Appeals,[30] the ends of justice are not served if further litigation is
encouraged when the issue is determinable based on the records.
A court judgment becomes useless and ineffective if the employer, in this case CCC as a mother
corporation, is placed beyond the legal reach of the judgment creditor who, after protracted litigation, has
been found entitled to positive relief. Courts have been organized to put an end to controversy. This
purpose should not be negated by an inapplicable and wrong use of the fiction of the corporate veil.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and ASIDE. The injunction
against the holding of an auction sale for the execution of the decision in Civil Case No. Q-30583 of
properties of General Credit Corporation, and the levying upon and selling on execution of other
properties of General Credit Corporation, is LIFTED.
SO ORDERED.
[G.R. No. 129459. September 29, 1998]
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF
APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.
DECISION
PANGANIBAN, J.
May a corporate treasurer, by herself and without any authorization from the board of directors, validly
sell a parcel of land owned by the corporation? May the veil of corporate fiction be pierced on the mere
ground that almost all of the shares of stock of the corporation are owned by said treasurer and her
husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition for Review on
Certiorari before us, assailing the March 18, 1997 Decision[1]of the Court of Appeals[2] in CA GR CV No.

46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro
Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the
Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION
ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received from plaintiff-appellant. There is no pronouncement as
to costs.[4]
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.[5]
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint alleged that on
14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens
Subdivision located in the District of Murphy, Quezon City, Metro Manila, containing an area of Four
Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876; that as stipulated in the
Agreement of 14 February 1989, plaintiff-appellant paid the down payment in the sum of One Hundred
Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on March 1,
1989, Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee
Motorich Sales Corporation requesting for a computation of the balance to be paid; that said letter was
coursed through defendant-appellees broker, Linda Aduca, who wrote the computation of the balance;
that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance,
covered by Metrobank Cashiers Check No. 004223, payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to
meet in the office of plaintiff-appellant but defendant-appellees treasurer, Nenita Lee Gruenberg, did not
appear; that defendant-appellee Motorich Sales Corporation despite repeated demands and in utter
disregard of its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a
necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said
defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party
in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation; that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales
Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new title in the
name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee Gruenberg and
Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of defendantsappellees Nenita Lee Gruenberg and Motorich Sales Corporations bad faith in refusing to execute a
formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages
which may be assessed against defendants-appellees in the sum of Five Hundred Thousand (500,000.00)
Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations
unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or
formal deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary
damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendantsappellees bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiffappellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred
Thousand (P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg
and Motorich Sales Corporations bad faith in refusing to execute a deed of sale in favor of plaintiff-

appellant, it has been constrained to obtain the services of counsel at an agreed fee of One Hundred
Thousand (P100,000.00) Pesos plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as
affirmative defense that the President and Chairman of Motorich did not sign the agreement adverted to in
par. 3 of the amended complaint; that Mrs. Gruenbergs signature on the agreement (ref: par. 3 of
Amended Complaint) is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo
Gruenberg, President and Chairman of Motorich, is required; that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of Rights (Annex B of amended complaint) at the
time the Agreement (Annex B of amended complaint) was signed; that plaintiff-appellant itself drafted
the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting,
without admitting, the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in
legal tender within the stipulated period (up to March 2, 1989); that it was the understanding between
Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of Assignment will be signed
only upon receipt of cash payment; thus they agreed that if the payment be in check, they will meet at a
bank designated by plaintiff-appellant where they will encash the check and sign the Transfer of
Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the
check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing
plaintiff-appellants complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of
absolute sale in accordance with the agreement of February 14, 1989; and if so, whether plaintiff is
entitled to damages.
As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was indeed
authorized by defendant corporation, Motorich Sales, to dispose of that property covered by T.C.T. No.
(362909) 2876. Since the property is clearly owned by the corporation, Motorich Sales, then its
disposition should be governed by the requirement laid down in Sec. 40, of the Corporation Code of the
Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors xxx sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and
assets, including its goodwill xxx when authorized by the vote of the stockholders representing at least
two third (2/3) of the outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was
there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff should
have been on the look out under these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial evidence to hold
defendant Nenita Lee Gruenberg liable considering that she did not in anyway misrepresent herself to be
authorized by the corporation to sell the property to plaintiff (tsn dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at instance
for lack of merit.
Defendants counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of
Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del
Pilar, Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG,
hereinafter referred to as the TRANSFEROR;
- and -SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing
under and by virtue of the laws of the Philippines, with principal office address at Sumulong Highway,
Barrio Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter
referred to as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the
ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a
TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp.
as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as
follows:
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per
square meter; subject to the following terms:
a.
Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be paid
upon the execution of this agreement and shall form part of the total purchase price;
b.

Balance shall be payable on or before March 2, 1989;

2. That the monthly amortization for the month of February 1989 shall be for the account of the
Transferor; and that the monthly amortization starting March 21, 1989 shall be for the account of the
Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-described property and that there
[are] no existing liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date specified on 1. (b), the earnest money
shall be forfeited in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at
Greenhills, San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION

SAN STRUCTURAL &

TRANSFEROR

STEEL FABRICATORS
TRANSFEREE

[SGD.]
By:

[SGD.]

NENITA LEE GRUENBERG

By: ANDRES T. CO

Treasurer

President

Signed in the presence of:

[SGD.]
_________________________

[SGD.]
_____________________[6]

In its recourse before the Court of Appeals, petitioner insisted:

1.
Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in accordance
with the Agreement of February 14, 1989,
2.

Plaintiff is entitled to damages.[7]

As stated earlier, the Court of Appeals debunked petitioners arguments and affirmed the Decision of the
RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to
petitioner, the amount remitted as downpayment or earnest money. Hence, this petition before us.[8]
The Issues
Before this Court, petitioner raises the following issues:
I.

Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case

II. Whether or not the appellate court may consider matters which the parties failed to raise in the
lower court
III. Whether or not there is a valid and enforceable contract between the petitioner and the respondent
corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution of
answer in the transcript of stenographic note[s]
V.

Whether or not respondents are liable for damages and attorneys fees[9]

The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in the transcript of stenographic notes
material to the disposition of this case?
4. Are respondents liable for damages and attorneys fees?
The Courts Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered
through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner
insists that [w]hen Gruenberg and Co affixed their signatures on the contract they both consented to be
bound by the terms thereof. Ergo, petitioner contends that the contract is binding on the two
corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement according to which a lot owned by
Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because
it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly,
the property of the corporation is not the property of its stockholders or members and may not be sold by
the stockholders or members without express authorization from the corporations board of
directors.[10]Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors, or, when authorized either by its
bylaws or by its board resolution, through its officers or agents in the normal course of business. The
general principles of agency govern the relation between the corporation and its officers or agents, subject
to the articles of incorporation, bylaws, or relevant provisions of law.[11] Thus, this Court has held that a
corporate officer or agent may represent and bind the corporation in transactions with third persons to the
extent that the authority to do so has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused persons dealing with the officer or agent to believe that it has conferred.[12]
Furthermore, the Court has also recognized the rule that persons dealing with an assumed agent, whether
the assumed agency be a general or special one, are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19).[13] Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a
sale of its assets.[14]
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its
treasurer, to sell the subject parcel of land.[15]Consequently, petitioner had the burden of proving that
Nenita Gruenberg was in fact authorized to represent and bind Motorich in the transaction. Petitioner
failed to discharge this burden. Its offer of evidence before the trial court contained no proof of such
authority.[16] It has not shown any provision of said respondents articles of incorporation, bylaws or
board resolution to prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of
ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume that she, by

virtue of her position, was authorized to sell the property of the corporation. Selling is obviously foreign
to a corporate treasurers function, which generally has been described as to receive and keep the funds
of the corporation, and to disburse them in accordance with the authority given him by the board or the
properly authorized officers.[17]
Neither was such real estate sale shown to be a normal business activity of Motorich. The primary
purpose of Motorich is marketing, distribution, export and import in relation to a general merchandising
business.[18] Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope of her general authority.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of
the latter shall be in writing; otherwise, the sale shall be void.
ART. 1878 Special powers of attorney are necessary in the following case:
xxx

xxx

xxx

(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;
xxx

xxx

x x x.

Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its
acceptance of benefits, as evidenced by the receipt issued by Respondent Gruenberg.[19] Petitioner is
clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the
corporation. But when these officers exceed their authority, their actions cannot bind the corporation,
unless it has ratified such acts or is estopped from disclaiming them.[20]
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it
appear to any third person that she had the authority, to sell its land or to receive the earnest
money. Neither was there any proof that Motorich ratified, expressly or impliedly, the
contract. Petitioner rests its argument on the receipt, which, however, does not prove the fact of
ratification. The document is a hand-written one, not a corporate receipt, and it bears only Nenita
Gruenbergs signature. Certainly, this document alone does not prove that her acts were authorized or
ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the
obligation which is established. As found by the trial court[21] and affirmed by the Court of
Appeals,[22] there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that
the said contract was ratified by Motorich. This factual finding of the two courts is binding on this
Court.[23] As the consent of the seller was not obtained, no contract to bind the obligor was
perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of
land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under
Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot be
ratified.[24]

Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is
a close corporation. Since Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or
almost all or 99.866% to be accurate, of the subscribed capital stock [25] of Motorich, petitioner argues
that Gruenberg needed no authorization from the board to enter into the subject contract. [26] It adds that,
being solely owned by the Spouses Gruenberg, the company can be treated as a close corporation which
can be bound by the acts of its principal stockholder who needs no specific authority. The Court is not
persuaded.
First, petitioner itself concedes having raised the issue belatedly,[27] not having done so during the trial,
but only when it filed its sur-rejoinder before the Court of Appeals.[28] Thus, this Court cannot entertain
said issue at this late stage of the proceedings. It is well-settled that points of law, theories and arguments
not brought to the attention of the trial court need not be, and ordinarily will not be, considered by a
reviewing court, as they cannot be raised for the first time on appeal.[29] Allowing petitioner to change
horses in midstream, as it were, is to run roughshod over the basic principles of fair play, justice and due
process.
Second, even if the above-mentioned argument were to be addressed at this time, the Court still finds no
reason to uphold it. True, one of the advantages of a corporate form of business organization is the
limitation of an investors liability to the amount of the investment.[30] This feature flows from the legal
theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily
granted privilege of a corporate veil may be used only for legitimate purposes. [31] On equitable
considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or
inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business
conduit of a person or an instrumentality, agency or adjunct of another corporation.[32]
Thus, the Court has consistently ruled that [w]hen the fiction is used as a means of perpetrating a fraud
or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation from the members or stockholders who compose it will
be lifted to allow for its consideration merely as an aggregation of individuals.[33]
We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud,
illegality or inequity committed on third persons. The question of piercing the veil of corporate fiction is
essentially, then, a matter of proof. In the present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its
officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the
expense of third persons, like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:
SEC. 96.
Definition and Applicability of Title. -- A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide that: (1) All of the corporations issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of its stock of any class. Notwithstanding the

foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. xxx.
The articles of incorporation[34] of Motorich Sales Corporation does not contain any provision stating that
(1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of
any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public
offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close
corporation.[35] Motorich does not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The [m]ere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personalities.[36] So too, a narrow
distribution of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals[37] wherein the Court ruled that
xxx petitioner corporation is classified as a close corporation and, consequently, a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the
action of its president.[38] But the factual milieu in Dulay is not on all fours with the present
case. In Dulay, the sale of real property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors.[39] In the present case, Motorich is not a close
corporation, as previously discussed, and the agreement was entered into by the corporate treasurer
without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an action by a director, who singly is the
controlling stockholder, may be considered as a binding corporate act and a board action as nothing more
than a mere formality.[40] The present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost 99.866% of Respondent
Motorich.[41] Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned
exception does not apply. Granting arguendo that the corporate veil of Motorich is to be disregarded, the
subject parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the same
was acquired during their marriage. There being no indication that said spouses, who appear to have been
married before the effectivity of the Family Code, have agreed to a different property regime, their
property relations would be governed by conjugal partnership of gains.[42] As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot because [t]here is no co-ownership between
the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in
favor of another his or her interest in the partnership or in any property belonging to it; neither spouse can
ask for a partition of the properties before the partnership has been legally dissolved.[43]
Assuming further, for the sake of argument, that the spouses property regime is the absolute community
of property, the sale would still be invalid. Under this regime, alienation of community property must
have the written consent of the other spouse or the authority of the court without which the disposition or
encumbrance is void.[44] Both requirements are manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic notes(TSN):
Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?
A

Yes, sir.[45]

Petitioner claims that the answer Yes was crossed out, and, in its place was written a No with an
initial scribbled above it.[46] This, however, is insufficient to prove that Nenita Gruenberg was authorized
to represent Respondent Motorich in the sale of its immovable property. Said excerpt should be
understood in the context of her whole testimony. During her cross-examination, Respondent Gruenberg
testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q

Even then you kn[e]w all along that you [were] not authorized?

Yes, sir.

Q You stated on direct examination that you did not represent that you were authorized to sell the
property?
A

Yes, sir.

Q But you also did not say that you were not authorized to sell the property, you did not tell that to Mr.
Co, is that correct?
A

That was not asked of me.

Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the president who [was]
also authorized to sign on behalf of the corporation.
Q

You did not say that you were not authorized nor did you say that you were authorized?

A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest
money at that time. That was our first meeting.[47]
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On
the other hand, her testimony demonstrates that the president of Petitioner Corporation, in his great desire
to buy the property, threw caution to the wind by offering and paying the earnest money without first
verifying Gruenbergs authority to sell the lot.
Fourth Issue:
Damages and Attorneys Fees
Finally, petitioner prays for damages and attorneys fees, alleging that [i]n an utter display of malice and
bad faith, [r]espondents attempted and succeeded in impressing on the trial court and [the] Court of
Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite the
receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales
Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize
Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned, despite
receipt and enjoyment of the proceeds of Gruenbergs act.[48] Assuming that Respondent Motorich was
not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable
because she acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation.[49]

As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing
allegations lack factual bases. Hence, an award of damages or attorneys fees cannot be justified. The
amount paid as earnest money was not proven to have redounded to the benefit of Respondent
Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich,
because it was deposited with the account of Aren Commercial c/o Motorich Sales
Corporation.[50] Respondent Gruenberg, however, disputes the allegations of petitioner. She testified as
follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was
encashed.
A

Yes, sir, the check was paid in my name and I deposit[ed] it . . .

In your account?

Yes, sir. [51]

In any event, Gruenberg offered to return the amount to petitioner xxx since the sale did not push
through.[52]
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the
president of Petitioner Corporation for more than ten years and has also served as chief executive of two
other corporate entities.[53] Co cannot feign ignorance of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of Gruenbergs
authorization to enter into a contract to sell a parcel of land belonging to Motorich.
Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to persuade the
Court. Indubitably, petitioner appears to be the victim of its own officers negligence in entering into a
contract with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to
petitioner the amount she received as earnest money, as no one shall enrich himself at the expense of
another,[54] a principle embodied in Article 2154 of the Civil Code.[55] Although there was no binding
relation between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to sell
the property of Motorich.[56] Article 2155 of the Civil Code provides that [p]ayment by reason of a
mistake in the construction or application of a difficult question of law may come within the scope of the
preceding article.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
G.R. No. 84197 July 28, 1989
PIONEER
INSURANCE
&
SURETY
CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989

JACOB
S.
LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO
CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV
No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No.
66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R.
No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to
pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim
is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary damages in the
amount of P184,878.84 with interest from the filing of the cross-complaints until the
amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for
each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and
another P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against
defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses

the amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per year from
1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of
P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed in
good faith. The fact that the properties of the Bormaheco and the Cervanteses were
attached and that they were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect his rights, he should not
be saddled with moral or exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that ordered it, in the exercise of
its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party
defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in the
insurance business. No further claim or counter-claim for or against anybody is declared
by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owneroperator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed
some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand his airline business. They executed
two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by
Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity
agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to
indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages,
taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in
consequence of having become surety upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts of money which it or its representatives should
or may pay or cause to be paid or become liable to pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as
deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated
therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly

registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they
are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that
they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for
being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase
of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G.
R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured
its risk of liability under the surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation
to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the
amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not
the real party in interest to institute the instant action as it does not stand to be benefited
or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount
from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not

even present any evidence that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter. To qualify a person to be a
real party in interest in whose name an action must be prosecuted, he must appear to be
the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the
party who would be benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party
in interest is meant a present substantial interest as distinguished from a mere expectancy
or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil.
27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party
in interest as it has already been paid by the reinsurer the sum of P295,000.00 the bulk
of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes
and its spare engine, realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance
amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess
of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by
the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant
Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties
herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo,
p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had
any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer
pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is
entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment
is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid
to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by
the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim
against defendants, considering the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the
said surety bond, it is plain that on this score it no longer has any right to collect to the
extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words,
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their
attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer is
suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of
all, Pioneer has no right to institute and maintain in its own name an action for the benefit
of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own
name instead of that of the principal will not prosper, and this is so even where the name
of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action
must be prosecuted in the name of the real party in interest.' This
provision is mandatory. The real party in interest is the party who would
be benefitted or injured by the judgment or is the party entitled to the
avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a real
party in interest, that there is no law permitting an action to be brought
by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep.
484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos
Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA
706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is the amount for which Pioneer
may sue defendants, assuming that the indemnity agreement is still valid and effective.
But since the amount realized from the sale of the mortgaged chattels are P35,000.00 for
one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is
still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants.
(Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering
this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to
the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to
Section 91 (should be Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old
Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55
S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v.
Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the insurer, it
is provided in said article that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the insurer does not fully cover
the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint
as against the respondents for the reason that the petitioner was not the real party in interest in the
complaint and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any grounds except its allegation that respondent
"Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed
to issue the bond provided that the same would be mortgaged to it, but this was not
possible because the planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security
for the claim sought to be enforced by this action, which necessarily means that the
indemnity agreement had ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the
planes and spare parts, no longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The indemnity agreement was
ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as
indemnitors, would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of
foreclosure precludes any further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any
unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas
Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the contention
that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising
the rights of JDA as vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these defendants and defendant

Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The change
of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three months
interval installments, the first of which shall be due and payable 25
August 1965, the remainder of which ... shall be due and payable on the
26th day x x x of each succeeding three months and the last of which
shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or
Lim and JDA, modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three month
interval installments the first of which shall be due and payable 4
September 1965, the remainder of which ... shall be due and payable on
the 4th day ... of each succeeding months and the last of which shall be
due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity
dates different from that fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the rest of the installments, the 15th
of each succeeding three months, that of the last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected twice,
were done without the knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed
that these defendants and defendant Maglana knew of and consented to the modification
of the obligations. But if that were so, there would have been the corresponding
documents in the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable by analogy are the rulings of
the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563,
and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty The mere failure on
the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension time referred to herein, (New
Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,
Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within ten days from
default of Lim or SAL on every installment, released Pioneer from liability from the
claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer and its
surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to
do business through the corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be treated in situations where
their contributions to the intended 'corporation' were invested not through the corporate
form? This Petition presents these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must share
in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims in
the total amount of P184,878.74 as correctly found by the trial court, with interest from
the filing of the cross-complaints until the amount is fully paid. Defendant Lim should
pay one-half of the said amount to Bormaheco and the Cervanteses and the other one-half
to defendant Maglana. It is established in the records that defendant Lim had duly
received the amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes and spare

parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses,
hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and the
laws of the state relating thereto and not by the rules governing partners (Cannon v.
Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that
persons who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229,
29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together
under articles to purchase property to carry on a business, and their organization is so
defective as to come short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the company to the property
acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84
A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons
associated themselves as a corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him, and no stock
was ever issued in the corporation, it was treated as a trustee for the associates in an
action between them for an accounting, and its capital stock was treated as partnership
assets, sold, and the proceeds distributed among them in proportion to the value of the
property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation
does not necessarily exist, for ordinarily persons cannot be made to assume the relation
of partners, as between themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and contribution (Ward v.
Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear
during the pretrial despite notification. In his answer, the petitioner denied having received any amount
from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing
the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru
the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the
effect that they were induced and lured by the petitioner to make contributions to a proposed corporation

which was never formed because the petitioner reneged on their agreement. Maglana alleged in his crossclaim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana
to expand his airline business. Lim was to procure two DC-3's from Japan and secure the
necessary certificates of public convenience and necessity as well as the required permits
for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of
P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt
thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate his airline in
accordance with their agreement and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused, failed and still refuses to set
up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and
third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh.
E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance
with the plaintiff, signed and executed the alleged chattel mortgage and surety bond
agreement in his personal capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and misrepresentation of the other,
Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by
defendant Lim, thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting to an aggregate
sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted
and refused to comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own
and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare
parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
G.R. No. 113375 May 5, 1994
KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A. RIGOS, ERME
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO
SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO,

RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, SEN. FREDDIE WEBB,

SEN.
WIGBERTO
TAADA,
and
REP.
JOKER
P.
ARROYO, petitioners,
vs.
TEOFISTO GUINGONA, JR., in his capacity as Executive Secretary, Office of the President;
RENATO CORONA, in his capacity as Assistant Executive Secretary and Chairman of the
Presidential review Committee on the Lotto, Office of the President; PHILIPPINE CHARITY
SWEEPSTAKES OFFICE; and PHILIPPINE GAMING MANAGEMENT CORPORATION,
respondents.
Jovito R. Salonga, Fernando Santiago, Emilio C. Capulong, Jr. and Felipe L. Gozon for petitioners.
Renato L. Cayetano and Eleazar B. Reyes for PGMC.
Gamaliel G. Bongco, Oscar Karaan and Jedideoh Sincero for intervenors.

DAVIDE, JR., J.:

This is a special civil action for prohibition and injunction, with a prayer for a temporary restraining order
and preliminary injunction, which seeks to prohibit and restrain the implementation of the "Contract of
Lease" executed by the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Gaming
Management Corporation (PGMC) in connection with the on- line lottery system, also known as "lotto."
Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a non-stock domestic corporation
composed of civic-spirited citizens, pastors, priests, nuns, and lay leaders who are committed to the cause
of truth, justice, and national renewal. The rest of the petitioners, except Senators Freddie Webb and
Wigberto Taada and Representative Joker P. Arroyo, are suing in their capacities as members of the
Board of Trustees of KILOSBAYAN and as taxpayers and concerned citizens. Senators Webb and
Taada and Representative Arroyo are suing in their capacities as members of Congress and as taxpayers
and concerned citizens of the Philippines.
The pleadings of the parties disclose the factual antecedents which triggered off the filing of this petition.
Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169, as amended by B.P. Blg. 42) which
grants it the authority to hold and conduct "charity sweepstakes races, lotteries and other similar
activities," the PCSO decided to establish an on- line lottery system for the purpose of increasing its
revenue base and diversifying its sources of funds. Sometime before March 1993, after learning that the
PCSO was interested in operating an on-line lottery system, the Berjaya Group Berhad, "a multinational
company and one of the ten largest public companies in Malaysia," long "engaged in, among others,
successful lottery operations in Asia, running both Lotto and Digit games, thru its subsidiary, Sports Toto
Malaysia," with its "affiliate, the International Totalizator Systems, Inc., . . . an American public company
engaged in the international sale or provision of computer systems, softwares, terminals, training and
other technical services to the gaming industry," "became interested to offer its services and resources to
PCSO." As an initial step, Berjaya Group Berhad (through its individual nominees) organized with some
Filipino investors in March 1993 a Philippine corporation known as the Philippine Gaming Management
Corporation (PGMC), which "was intended to be the medium through which the technical and
management services required for the project would be offered and delivered to PCSO." 1

Before August 1993, the PCSO formally issued a Request for Proposal (RFP) for the Lease Contract of an
on-line lottery system for the PCSO. 2 Relevant provisions of the RFP are the following:
1. EXECUTIVE SUMMARY
xxx xxx xxx
1.2. PCSO is seeking a suitable contractor which shall build, at its own expense, all the
facilities ('Facilities') needed to operate and maintain a nationwide on-line lottery system.
PCSO shall lease the Facilities for a fixed percentage ofquarterly gross receipts. All
receipts from ticket sales shall be turned over directly to PCSO. All capital, operating
expenses and expansion expenses and risks shall be for the exclusive account of the
Lessor.
xxx xxx xxx
1.4. The lease shall be for a period not exceeding fifteen (15) years.
1.5. The Lessor is expected to submit a comprehensive nationwide lottery development
plan ("Development Plan") which will include the game, the marketing of the games, and
the logistics to introduce the games to all the cities and municipalities of the country
within five (5) years.
xxx xxx xxx
1.7. The Lessor shall be selected based on its technical expertise, hardware and software
capability, maintenance support, and financial resources. The Development Plan shall
have a substantial bearing on the choice of the Lessor. The Lessor shall be a domestic
corporation, with at least sixty percent (60%) of its shares owned by Filipino
shareholders.
xxx xxx xxx
The Office of the President, the National Disaster Control Coordinating Council, the
Philippine National Police, and the National Bureau of Investigation shall be authorized
to use the nationwide telecommunications system of the Facilities Free of Charge.
1.8. Upon expiration of the lease, the Facilities shall be owned by PCSO without any
additional consideration. 3
xxx xxx xxx
2.2. OBJECTIVES
The objectives of PCSO in leasing the Facilities from a private entity are as follows:
xxx xxx xxx

2.2.2. Enable PCSO to operate a nationwide on-line Lottery system at no expense or risk
to the government.
xxx xxx xxx
2.4. DUTIES AND RESPONSIBILITIES OF THE LESSOR
xxx xxx xxx
2.4.2. THE LESSOR
The Proponent is expected to furnish and maintain the Facilities, including the personnel
needed to operate the computers, the communications network and sales offices under a
build-lease basis. The printing of tickets shall be undertaken under the supervision and
control of PCSO. The Facilities shall enable PCSO to computerize the entire gaming
system.
The Proponent is expected to formulate and design consumer-oriented Master Games
Plan suited to the marketplace, especially geared to Filipino gaming habits and
preferences. In addition, the Master Games Plan is expected to include a Product Plan for
each game and explain how each will be introduced into the market. This will be an
integral part of the Development Plan which PCSO will require from the Proponent.
xxx xxx xxx
The Proponent is expected to provide upgrades to modernize the entire gaming system
over the life ofthe lease contract.
The Proponent is expected to provide technology transfer to PCSO technical personnel. 4
7. GENERAL GUIDELINES FOR PROPONENTS
xxx xxx xxx
Finally, the Proponent must be able to stand the acid test of proving that it is an entity
able to take on the role of responsible maintainer of the on-line lottery system, and able to
achieve PSCO's goal of formalizing an on-line lottery system to achieve its mandated
objective. 5
xxx xxx xxx
16. DEFINITION OF TERMS
Facilities: All capital equipment, computers, terminals, software, nationwide
telecommunication network, ticket sales offices, furnishings, and fixtures; printing costs;
cost of salaries and wages; advertising and promotion expenses; maintenance costs;
expansion and replacement costs; security and insurance, and all other related expenses
needed to operate nationwide on-line lottery system. 6

Considering the above citizenship requirement, the PGMC claims that the Berjaya Group "undertook to
reduce its equity stakes in PGMC to 40%," by selling 35% out of the original 75% foreign stockholdings
to local investors.
On 15 August 1993, PGMC submitted its bid to the PCSO. 7
The bids were evaluated by the Special Pre-Qualification Bids and Awards Committee (SPBAC) for the
on-line lottery and its Bid Report was thereafter submitted to the Office of the President. 8 The submission
was preceded by complaints by the Committee's Chairperson, Dr. Mita Pardo de Tavera. 9
On 21 October 1993, the Office of the President announced that it had given the respondent PGMC the
go-signal to operate the country's on-line lottery system and that the corresponding implementing contract
would be submitted not later than 8 November 1993 "for final clearance and approval by the Chief
Executive." 10 This announcement was published in the Manila Standard, Philippine Daily Inquirer, and
the Manila Times on 29 October 1993. 11
On 4 November 1993, KILOSBAYAN sent an open letter to Presidential Fidel V. Ramos strongly
opposing the setting up to the on-line lottery system on the basis of serious moral and ethical
considerations. 12
At the meeting of the Committee on Games and Amusements of the Senate on 12 November 1993,
KILOSBAYAN reiterated its vigorous opposition to the on-line lottery on account of its immorality and
illegality. 13
On 19 November 1993, the media reported that despite the opposition, "Malacaang will push through
with the operation of an on-line lottery system nationwide" and that it is actually the respondent PCSO
which will operate the lottery while the winning corporate bidders are merely "lessors." 14
On 1 December 1993, KILOSBAYAN requested copies of all documents pertaining to the lottery award
from Executive Secretary Teofisto Guingona, Jr. In his answer of 17 December 1993, the Executive
Secretary informed KILOSBAYAN that the requested documents would be duly transmitted before the
end of the month. 15. However, on that same date, an agreement denominated as "Contract of Lease" was
finally executed by respondent PCSO and respondent PGMC. 16 The President, per the press statement
issued by the Office of the President, approved it on 20 December 1993. 17
In view of their materiality and relevance, we quote the following salient provisions of the Contract of
Lease:
1. DEFINITIONS
The following words and terms shall have the following respective meanings:
1.1 Rental Fee Amount to be paid by PCSO to the LESSOR as compensation for the
fulfillment of the obligations of the LESSOR under this Contract, including, but not
limited to the lease of the Facilities.
xxx xxx xxx

1.3 Facilities All capital equipment, computers, terminals, software (including source
codes for the On-Line Lottery application software for the terminals, telecommunications
and central systems), technology, intellectual property rights, telecommunications
network, and furnishings and fixtures.
1.4 Maintenance and Other Costs All costs and expenses relating to printing,
manpower, salaries and wages, advertising and promotion, maintenance, expansion and
replacement, security and insurance, and all other related expenses needed to operate an
On-Line Lottery System, which shall be for the account of the LESSOR. All expenses
relating to the setting-up, operation and maintenance of ticket sales offices of dealers and
retailers shall be borne by PCSO's dealers and retailers.
1.5 Development Plan The detailed plan of all games, the marketing thereof, number
of players, value of winnings and the logistics required to introduce the games, including
the Master Games Plan as approved by PCSO, attached hereto as Annex "A", modified as
necessary by the provisions of this Contract.
xxx xxx xxx
1.8 Escrow Deposit The proposal deposit in the sum of Three Hundred Million Pesos
(P300,000,000.00) submitted by the LESSOR to PCSO pursuant to the requirements of
the Request for Proposals.
2. SUBJECT MATTER OF THE LEASE
The LESSOR shall build, furnish and maintain at its own expense and risk the Facilities
for the On-Line Lottery System of PCSO in the Territory on an exclusive basis. The
LESSOR shall bear all Maintenance and Other Costs as defined herein.
xxx xxx xxx
3. RENTAL FEE
For and in consideration of the performance by the LESSOR of its obligations herein,
PCSO shall pay LESSOR a fixed Rental Fee equal to four point nine percent (4.9%) of
gross receipts from ticket sales, payable net of taxes required by law to be withheld, on a
semi-monthly basis. Goodwill, franchise and similar fees shall belong to PCSO.
4. LEASE PERIOD
The period of the lease shall commence ninety (90) days from the date of effectivity of
this Contract and shall run for a period of eight (8) years thereafter, unless sooner
terminated in accordance with this Contract.
5. RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE ON-LINE
LOTTERY SYSTEM
PCSO shall be the sole and individual operator of the On-Line Lottery System.
Consequently:

5.1 PCSO shall have sole responsibility to decide whether to implement, fully or
partially, the Master Games Plan of the LESSOR. PCSO shall have the sole responsibility
to determine the time for introducing new games to the market. The Master Games Plan
included in Annex "A" hereof is hereby approved by PCSO.
5.2 PCSO shall have control over revenues and receipts of whatever nature from the OnLine Lottery System. After paying the Rental Fee to the LESSOR, PCSO shall have
exclusive responsibility to determine the Revenue Allocation Plan; Provided, that the
same shall be consistent with the requirement of R.A. No. 1169, as amended, which fixes
a prize fund of fifty five percent (55%) on the average.
5.3 PCSO shall have exclusive control over the printing of tickets, including but not
limited to the design, text, and contents thereof.
5.4 PCSO shall have sole responsibility over the appointment of dealers or retailers
throughout the country. PCSO shall appoint the dealers and retailers in a timely manner
with due regard to the implementation timetable of the On-Line Lottery System. Nothing
herein shall preclude the LESSOR from recommending dealers or retailers for
appointment by PCSO, which shall act on said recommendation within forty-eight (48)
hours.
5.5 PCSO shall designate the necessary personnel to monitor and audit the daily
performance of the On-Line Lottery System. For this purpose, PCSO designees shall be
given, free of charge, suitable and adequate space, furniture and fixtures, in all offices of
the LESSOR, including but not limited to its headquarters, alternate site, regional and
area offices.
5.6 PCSO shall have the responsibility to resolve, and exclusive jurisdiction over, all
matters involving the operation of the On-Line Lottery System not otherwise provided in
this Contract.
5.7 PCSO shall promulgate procedural and coordinating rules governing all activities
relating to the On-Line Lottery System.
5.8 PCSO will be responsible for the payment of prize monies, commissions to agents
and dealers, and taxes and levies (if any) chargeable to the operator of the On-Line
Lottery System. The LESSOR will bear all other Maintenance and Other Costs, except as
provided in Section 1.4.
5.9 PCSO shall assist the LESSOR in the following:
5.9.1 Work permits for the LESSOR's staff;
5.9.2 Approvals for importation of the Facilities;
5.9.3 Approvals and consents for the On-Line Lottery System; and
5.9.4 Business and premises licenses for all offices of the LESSOR and
licenses for the telecommunications network.

5.10 In the event that PCSO shall pre-terminate this Contract or suspend the operation of
the On-Line Lottery System, in breach of this Contract and through no fault of the
LESSOR, PCSO shall promptly, and in any event not later than sixty (60) days,
reimburse the LESSOR the amount of its total investment cost associated with the OnLine Lottery System, including but not limited to the cost of the Facilities, and further
compensate the LESSOR for loss of expected net profit after tax, computed over the
unexpired term of the lease.
6. DUTIES AND RESPONSIBILITIES OF THE LESSOR
The LESSOR is one of not more than three (3) lessors of similar facilities for the
nationwide On-Line Lottery System of PCSO. It is understood that the rights of the
LESSOR are primarily those of a lessor of the Facilities, and consequently, all rights
involving the business aspects of the use of the Facilities are within the jurisdiction of
PCSO. During the term of the lease, the LESSOR shall.
6.1 Maintain and preserve its corporate existence, rights and privileges, and conduct its
business in an orderly, efficient, and customary manner.
6.2 Maintain insurance coverage with insurers acceptable to PCSO on all Facilities.
6.3 Comply with all laws, statues, rules and regulations, orders and directives, obligations
and duties by which it is legally bound.
6.4 Duly pay and discharge all taxes, assessments and government charges now and
hereafter imposed of whatever nature that may be legally levied upon it.
6.5 Keep all the Facilities in fail safe condition and, if necessary, upgrade, replace and
improve the Facilities from time to time as new technology develops, in order to make
the On-Line Lottery System more cost-effective and/or competitive, and as may be
required by PCSO shall not impose such requirements unreasonably nor arbitrarily.
6.6 Provide PCSO with management terminals which will allow real-time monitoring of
the On-Line Lottery System.
6.7 Upon effectivity of this Contract, commence the training of PCSO and other local
personnel and the transfer of technology and expertise, such that at the end of the term of
this Contract, PCSO will be able to effectively take-over the Facilities and efficiently
operate the On-Line Lottery System.
6.8 Undertake a positive advertising and promotions campaign for both institutional and
product lines without engaging in negative advertising against other lessors.
6.9 Bear all expenses and risks relating to the Facilities including, but not limited to,
Maintenance and Other Costs and:
xxx xxx xxx

6.10 Bear all risks if the revenues from ticket sales, on an annualized basis, are
insufficient to pay the entire prize money.
6.11 Be, and is hereby, authorized to collect and retain for its own account, a security
deposit from dealers and retailers, in an amount determined with the approval of PCSO,
in respect of equipment supplied by the LESSOR. PCSO's approval shall not be
unreasonably withheld.
xxx xxx xxx
6.12 Comply with procedural and coordinating rules issued by PCSO.
7. REPRESENTATIONS AND WARRANTIES
The LESSOR represents and warrants that:
7.1 The LESSOR is corporation duly organized and existing under the laws of the
Republic of the Philippines, at least sixty percent (60%) of the outstanding capital stock
of which is owned by Filipino shareholders. The minimum required Filipino equity
participation shall not be impaired through voluntary or involuntary transfer, disposition,
or sale of shares of stock by the present stockholders.
7.2 The LESSOR and its Affiliates have the full corporate and legal power and authority
to own and operate their properties and to carry on their business in the place where such
properties are now or may be conducted. . . .
7.3 The LESSOR has or has access to all the financing and funding requirements to
promptly and effectively carry out the terms of this Contract. . . .
7.4 The LESSOR has or has access to all the managerial and technical expertise to
promptly and effectively carry out the terms of this Contract. . . .
xxx xxx xxx
10. TELECOMMUNICATIONS NETWORK
The LESSOR shall establish a telecommunications network that will connect all
municipalities and cities in the Territory in accordance with, at the LESSOR's option,
either of the LESSOR's proposals (or a combinations of both such proposals) attached
hereto as Annex "B," and under the following PCSO schedule:
xxx xxx xxx
PCSO may, at its option, require the LESSOR to establish the telecommunications
network in accordance with the above Timetable in provinces where the LESSOR has not
yet installed terminals. Provided, that such provinces have existing nodes. Once a
municipality or city is serviced by land lines of a licensed public telephone company, and
such lines are connected to Metro Manila, then the obligation of the LESSOR to connect
such municipality or city through a telecommunications network shall cease with respect

to such municipality or city. The voice facility will cover the four offices of the Office of
the President, National Disaster Control Coordinating Council, Philippine National Police
and the National Bureau of Investigation, and each city and municipality in the Territory
except Metro Manila, and those cities and municipalities which have easy telephone
access from these four offices. Voice calls from the four offices shall be transmitted via
radio or VSAT to the remote municipalities which will be connected to this voice facility
through wired network or by radio. The facility shall be designed to handle four private
conversations at any one time.
xxx xxx xxx
13. STOCK DISPERSAL PLAN
Within two (2) years from the effectivity of this Contract, the LESSOR shall cause itself
to be listed in the local stock exchange and offer at least twenty five percent (25%) of its
equity to the public.
14. NON-COMPETITION
The LESSOR shall not, directly or indirectly, undertake any activity or business in
competition with or adverse to the On-Line Lottery System of PCSO unless it obtains the
latter's prior written consent thereto.
15. HOLD HARMLESS CLAUSE
15.1 The LESSOR shall at all times protect and defend, at its cost and expense, PCSO
from and against any and all liabilities and claims for damages and/or suits for or by
reason of any deaths of, or any injury or injuries to any person or persons, or damages to
property of any kind whatsoever, caused by the LESSOR, its subcontractors, its
authorized agents or employees, from any cause or causes whatsoever.
15.2 The LESSOR hereby covenants and agrees to indemnify and hold PCSO harmless
from all liabilities, charges, expenses (including reasonable counsel fees) and costs on
account of or by reason of any such death or deaths, injury or injuries, liabilities, claims,
suits or losses caused by the LESSOR's fault or negligence.
15.3 The LESSOR shall at all times protect and defend, at its own cost and expense, its
title to the facilities and PCSO's interest therein from and against any and all claims for
the duration of the Contract until transfer to PCSO of ownership of the serviceable
Facilities.
16. SECURITY
16.1 To ensure faithful compliance by the LESSOR with the terms of the Contract, the
LESSOR shall secure a Performance Bond from a reputable insurance company or
companies acceptable to PCSO.
16.2 The Performance Bond shall be in the initial amount of Three Hundred Million
Pesos (P300,000,000.00), to its U.S. dollar equivalent, and shall be renewed to cover the

duration of the Contract. However, the Performance Bond shall be reduced

proportionately to the percentage of unencumbered terminals installed; Provided, that the
Performance Bond shall in no case be less than One Hundred Fifty Million Pesos
(P150,000,000.00).
16.3 The LESSOR may at its option maintain its Escrow Deposit as the Performance
Bond. . . .
17. PENALTIES
17.1 Except as may be provided in Section 17.2, should the LESSOR fail to take remedial
measures within seven (7) days, and rectify the breach within thirty (30) days, from
written notice by PCSO of any wilfull or grossly negligent violation of the material terms
and conditions of this Contract, all unencumbered Facilities shall automatically become
the property of PCSO without consideration and without need for further notice or
demand by PCSO. The Performance Bond shall likewise be forfeited in favor of PCSO.
17.2 Should the LESSOR fail to comply with the terms of the Timetables provided in
Section 9 and 10, it shall be subject to an initial Penalty of Twenty Thousand Pesos
(P20,000.00), per city or municipality per every month of delay; Provided, that the
Penalty shall increase, every ninety (90) days, by the amount of Twenty Thousand Pesos
(P20,000.00) per city or municipality per month, whilst shall failure to comply persists.
The penalty shall be deducted by PCSO from the rental fee.
xxx xxx xxx
20. OWNERSHIP OF THE FACILITIES
After expiration of the term of the lease as provided in Section 4, the Facilities directly
required for the On-Line Lottery System mentioned in Section 1.3 shall automatically
belong in full ownership to PCSO without any further consideration other than the Rental
Fees already paid during the effectivity of the lease.
21. TERMINATION OF THE LEASE
PCSO may terminate this Contract for any breach of the material provisions of this
Contract, including the following:
21.1 The LESSOR is insolvent or bankrupt or unable to pay its debts, stops or suspends
or threatens to stop or suspend payment of all or a material part of its debts, or proposes
or makes a general assignment or an arrangement or compositions with or for the benefit
of its creditors; or
21.2 An order is made or an effective resolution passed for the winding up or dissolution
of the LESSOR or when it ceases or threatens to cease to carry on all or a material part of
its operations or business; or
21.3 Any material statement, representation or warranty made or furnished by the
LESSOR proved to be materially false or misleading;

said termination to take effect upon receipt of written notice of

termination by the LESSOR and failure to take remedial action within
seven (7) days and cure or remedy the same within thirty (30) days from
notice.
Any suspension, cancellation or termination of this Contract shall not
relieve the LESSOR of any liability that may have already accrued
hereunder.
xxx xxx xxx
Considering the denial by the Office of the President of its protest and the statement of Assistant
Executive Secretary Renato Corona that "only a court injunction can stop Malacaang," and the imminent
implementation of the Contract of Lease in February 1994, KILOSBAYAN, with its co-petitioners, filed
on 28 January 1994 this petition.
In support of the petition, the petitioners claim that:
. . . X X THE OFFICE OF THE PRESIDENT, ACTING THROUGH
RESPONDENTS EXECUTIVE SECRETARY AND/OR ASSISTANT
EXECUTIVE SECRETARY FOR LEGAL AFFAIRS, AND THE PCSO
GRAVELY ABUSE[D] THEIR DISCRETION AND/OR FUNCTIONS
TANTAMOUNT TO LACK OF JURISDICTION AND/OR
AUTHORITY IN RESPECTIVELY: (A) APPROVING THE AWARD
OF THE CONTRACT TO, AND (B) ENTERING INTO THE SOCALLED "CONTRACT OF LEASE" WITH, RESPONDENT PGMC
FOR THE INSTALLATION, ESTABLISHMENT AND OPERATION
OF THE ON-LINE LOTTERY AND TELECOMMUNICATION
SYSTEMS REQUIRED AND/OR AUTHORIZED UNDER THE SAID
CONTRACT, CONSIDERING THAT:
a) Under Section 1 of the Charter of the PCSO, the PCSO is prohibited from holding and
conducting lotteries "in collaboration, association or joint venture with any person,
association, company or entity";
b) Under Act No. 3846 and established jurisprudence, a Congressional franchise is
required before any person may be allowed to establish and operate said
telecommunications system;
c) Under Section 11, Article XII of the Constitution, a less than 60% Filipino-owned
and/or controlled corporation, like the PGMC, is disqualified from operating a public
service, like the said telecommunications system; and
d) Respondent PGMC is not authorized by its charter and under the Foreign Investment
Act (R.A. No. 7042) to install, establish and operate the on-line lotto and
telecommunications systems. 18
Petitioners submit that the PCSO cannot validly enter into the assailed Contract of Lease with the PGMC
because it is an arrangement wherein the PCSO would hold and conduct the on-line lottery system in
"collaboration" or "association" with the PGMC, in violation of Section 1(B) of R.A. No. 1169, as

amended by B.P. Blg. 42, which prohibits the PCSO from holding and conducting charity sweepstakes
races, lotteries, and other similar activities "in collaboration, association or joint venture with any person,
association, company or entity, foreign or domestic." Even granting arguendo that a lease of facilities is
not within the contemplation of "collaboration" or "association," an analysis, however, of the Contract of
Lease clearly shows that there is a "collaboration, association, or joint venture between respondents
PCSO and PGMC in the holding of the On-Line Lottery System," and that there are terms and conditions
of the Contract "showing that respondent PGMC is the actual lotto operator and not respondent PCSO." 19
The petitioners also point out that paragraph 10 of the Contract of Lease requires or authorizes PGMC to
establish a telecommunications network that will connect all the municipalities and cities in the territory.
However, PGMC cannot do that because it has no franchise from Congress to construct, install, establish,
or operate the network pursuant to Section 1 of Act No. 3846, as amended. Moreover, PGMC is a 75%
foreign-owned or controlled corporation and cannot, therefore, be granted a franchise for that purpose
because of Section 11, Article XII of the 1987 Constitution. Furthermore, since "the subscribed foreign
capital" of the PGMC "comes to about 75%, as shown by paragraph EIGHT of its Articles of
Incorporation," it cannot lawfully enter into the contract in question because all forms of gambling and
lottery is one of them are included in the so-called foreign investments negative list under the Foreign
Investments Act (R.A. No. 7042) where only up to 40% foreign capital is allowed. 20
Finally, the petitioners insist that the Articles of Incorporation of PGMC do not authorize it to establish
and operate an on-line lottery and telecommunications systems. 21
Accordingly, the petitioners pray that we issue a temporary restraining order and a writ of preliminary
injunction commanding the respondents or any person acting in their places or upon their instructions to
cease and desist from implementing the challenged Contract of Lease and, after hearing the merits of the
petition, that we render judgment declaring the Contract of Lease void and without effect and making the
injunction permanent. 22
We required the respondents to comment on the petition.
In its Comment filed on 1 March 1994, private respondent PGMC asserts that "(1) [it] is merely an
independent contractor for a piece of work, (i.e., the building and maintenance of a lottery system to be
used by PCSO in the operation of its lottery franchise); and (2) as such independent contractor, PGMC is
not a co-operator of the lottery franchise with PCSO, nor is PCSO sharing its franchise, 'in collaboration,
association or joint venture' with PGMC as such statutory limitation is viewed from the context, intent,
and spirit of Republic Act 1169, as amended by Batas Pambansa 42." It further claims that as an
independent contractor for a piece of work, it is neither engaged in "gambling" nor in "public service"
relative to the telecommunications network, which the petitioners even consider as an "indispensable
requirement" of an on-line lottery system. Finally, it states that the execution and implementation of the
contract does not violate the Constitution and the laws; that the issue on the "morality" of the lottery
franchise granted to the PCSO is political and not judicial or legal, which should be ventilated in another
forum; and that the "petitioners do not appear to have the legal standing or real interest in the subject
contract and in obtaining the reliefs sought." 23
In their Comment filed by the Office of the Solicitor General, public respondents Executive Secretary
Teofisto Guingona, Jr., Assistant Executive Secretary Renato Corona, and the PCSO maintain that the
contract of lease in question does not violate Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42,
and that the petitioner's interpretation of the phrase "in collaboration, association or joint venture" in
Section 1 is "much too narrow, strained and utterly devoid of logic" for it "ignores the reality that PCSO,
as a corporate entity, is vested with the basic and essential prerogative to enter into all kinds of

transactions or contracts as may be necessary for the attainment of its purposes and objectives." What the
PCSO charter "seeks to prohibit is that arrangement akin to a "joint venture" or partnership where there is
"community of interest in the business, sharing of profits and losses, and a mutual right of control," a
characteristic which does not obtain in a contract of lease." With respect to the challenged Contract of
Lease, the "role of PGMC is limited to that of a lessor of the facilities" for the on-line lottery system; in
"strict technical and legal sense," said contract "can be categorized as a contract for a piece of work as
defined in Articles 1467, 1713 and 1644 of the Civil Code."
They further claim that the establishment of the telecommunications system stipulated in the Contract of
Lease does not require a congressional franchise because PGMC will not operate a public utility;
moreover, PGMC's "establishment of a telecommunications system is not intended to establish a
telecommunications business," and it has been held that where the facilities are operated "not for business
purposes but for its own use," a legislative franchise is not required before a certificate of public
convenience can be granted. 24 Even granting arguendo that PGMC is a public utility, pursuant toAlbano
S.
Reyes, 25 "it can establish a telecommunications system even without a legislative franchise because not
every public utility is required to secure a legislative franchise before it could establish, maintain, and
operate the service"; and, in any case, "PGMC's establishment of the telecommunications system
stipulated in its contract of lease with PCSO falls within the exceptions under Section 1 of Act No. 3846
where a legislative franchise is not necessary for the establishment of radio stations."
They also argue that the contract does not violate the Foreign Investment Act of 1991; that the Articles of
Incorporation of PGMC authorize it to enter into the Contract of Lease; and that the issues of "wisdom,
morality and propriety of acts of the executive department are beyond the ambit of judicial review."
Finally, the public respondents allege that the petitioners have no standing to maintain the instant suit,
citing our resolution in Valmonte vs. Philippine Charity Sweepstakes Office. 26
Several parties filed motions to intervene as petitioners in this case, 27 but only the motion of Senators
Alberto Romulo, Arturo Tolentino, Francisco Tatad, Gloria Macapagal-Arroyo, Vicente Sotto III, John
Osmea, Ramon Revilla, and Jose Lina28 was granted, and the respondents were required to comment on
their petition in intervention, which the public respondents and PGMC did.
In the meantime, the petitioners filed with the Securities and Exchange Commission on 29 March 1994 a
petition against PGMC for the nullification of the latter's General Information Sheets. That case, however,
has no bearing in this petition.
On 11 April 1994, we heard the parties in oral arguments. Thereafter, we resolved to consider the matter
submitted for resolution and pending resolution of the major issues in this case, to issue a temporary
restraining order commanding the respondents or any person acting in their place or upon their
instructions to cease and desist from implementing the challenged Contract of Lease.
In the deliberation on this case on 26 April 1994, we resolved to consider only these issues: (a) the locus
standi of the petitioners, and (b) the legality and validity of the Contract of Lease in the light of Section 1
of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the PCSO from holding and conducting
lotteries "in collaboration, association or joint venture with any person, association, company or entity,
whether domestic or foreign." On the first issue, seven Justices voted to sustain the locus standi of the
petitioners, while six voted not to. On the second issue, the seven Justices were of the opinion that the
Contract of Lease violates the exception to Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42,
and is, therefore, invalid and contrary to law. The six Justices stated that they wished to express no

opinion thereon in view of their stand on the first issue. The Chief Justice took no part because one of the
Directors of the PCSO is his brother-in-law.
This case was then assigned to this ponente for the writing of the opinion of the Court.
The preliminary issue on the locus standi of the petitioners should, indeed, be resolved in their favor. A
party's standing before this Court is a procedural technicality which it may, in the exercise of its
discretion, set aside in view of the importance of the issues raised. In the landmark Emergency Powers
Cases, 29 this Court brushed aside this technicality because "the transcendental importance to the public of
these cases demands that they be settled promptly and definitely, brushing aside, if we must, technicalities
of procedure. (Avelino vs. Cuenco, G.R. No. L-2821)." Insofar as taxpayers' suits are concerned, this
Court had declared that it "is not devoid of discretion as to whether or not it should be entertained," 30or
that it "enjoys an open discretion to entertain the same or not." 31 In De La Llana vs. Alba, 32 this Court
declared:
1. The argument as to the lack of standing of petitioners is easily resolved. As far as
Judge de la Llana is concerned, he certainly falls within the principle set forth in Justice
Laurel's opinion in People vs. Vera [65 Phil. 56 (1937)]. Thus: "The unchallenged rule is
that the person who impugns the validity of a statute must have a personal and substantial
interest in the case such that he has sustained, or will sustain, direct injury as a result of
its enforcement [Ibid, 89]. The other petitioners as members of the bar and officers of the
court cannot be considered as devoid of "any personal and substantial interest" on the
matter. There is relevance to this excerpt from a separate opinion in Aquino, Jr. v.
Commission on Elections [L-40004, January 31, 1975, 62 SCRA 275]: "Then there is the
attack on the standing of petitioners, as vindicating at most what they consider a public
right and not protecting their rights as individuals. This is to conjure the specter of the
public right dogma as an inhibition to parties intent on keeping public officials staying on
the path of constitutionalism. As was so well put by Jaffe; "The protection of private
rights is an essential constituent of public interest and, conversely, without a well-ordered
state there could be no enforcement of private rights. Private and public interests are, both
in a substantive and procedural sense, aspects of the totality of the legal order."
Moreover, petitioners have convincingly shown that in their capacity as taxpayers, their
standing to sue has been amply demonstrated. There would be a retreat from the liberal
approach followed in Pascual v. Secretary of Public Works, foreshadowed by the very
decision of People v. Vera where the doctrine was first fully discussed, if we act
differently now. I do not think we are prepared to take that step. Respondents, however,
would hard back to the American Supreme Court doctrine in Mellon v. Frothingham,
with their claim that what petitioners possess "is an interest which is shared in common
by other people and is comparatively so minute and indeterminate as to afford any basis
and assurance that the judicial process can act on it." That is to speak in the language of a
bygone era, even in the United States. For as Chief Justice Warren clearly pointed out in
the later case of Flast v. Cohen, the barrier thus set up if not breached has definitely been
lowered.
In Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 33 reiterated in Basco vs.
Philippine Amusements and Gaming Corporation, 34 this Court stated:
Objections to taxpayers' suits for lack of sufficient personality standing or interest are,
however, in the main procedural matters. Considering the importance to the public of the
cases at bar, and in keeping with the Court's duty, under the 1987 Constitution, to

determine whether or not the other branches of government have kept themselves within
the limits of the Constitution and the laws and that they have not abused the discretion
given to them, this Court has brushed aside technicalities of procedure and has taken
cognizance of these petitions.
and in Association of Small Landowners in the Philippines, Inc. vs. Secretary of Agrarian Reform, 35 it
declared:
With particular regard to the requirement of proper party as applied in the cases before
us, we hold that the same is satisfied by the petitioners and intervenors because each of
them has sustained or is in danger of sustaining an immediate injury as a result of the acts
or measures complained of. [Ex Parte Levitt, 303 US 633]. And even if, strictly speaking,
they are not covered by the definition, it is still within the wide discretion of the Court to
waive the requirement and so remove the impediment to its addressing and resolving the
serious constitutional questions raised.
In the first Emergency Powers Cases, ordinary citizens and taxpayers were allowed to
question the constitutionality of several executive orders issued by President Quirino
although they were invoking only an indirect and general interest shared in common with
the public. The Court dismissed the objective that they were not proper parties and ruled
that the transcendental importance to the public of these cases demands that they be
settled promptly and definitely, brushing aside, if we must, technicalities of procedure.
We have since then applied this exception in many other cases. (Emphasis supplied)
In Daza vs. Singson, 36 this Court once more said:
. . . For another, we have early as in the Emergency Powers Cases that where serious
constitutional questions are involved, "the transcendental importance to the public of
these cases demands that they be settled promptly and definitely, brushing aside, if we
must, technicalities of procedure." The same policy has since then been consistently
followed by the Court, as in Gonzales vs. Commission on Elections [21 SCRA 774] . . .
The Federal Supreme Court of the United States of America has also expressed its discretionary power to
liberalize the rule on locus standi. In United States vs. Federal Power Commission and Virginia Rea
Association vs. Federal Power Commission, 37 it held:
We hold that petitioners have standing. Differences of view, however, preclude a single
opinion of the Court as to both petitioners. It would not further clarification of this
complicated specialty of federal jurisdiction, the solution of whose problems is in any
event more or less determined by the specific circumstances of individual situations, to
set out the divergent grounds in support of standing in these cases.
In line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of Congress, and
even association of planters, and non-profit civic organizations were allowed to initiate and prosecute
actions before this Court to question the constitutionality or validity of laws, acts, decisions, rulings, or
orders of various government agencies or instrumentalities. Among such cases were those assailing the
constitutionality of (a) R.A. No. 3836 insofar as it allows retirement gratuity and commutation of vacation
and sick leave to Senators and Representatives and to elective officials of both Houses of Congress; 38 (b)
Executive Order No. 284, issued by President Corazon C. Aquino on 25 July 1987, which allowed
members of the cabinet, their undersecretaries, and assistant secretaries to hold other government offices

or positions; 39 (c) the automatic appropriation for debt service in the General Appropriations Act; 40 (d)
R.A. No. 7056 on the holding of desynchronized elections; 41 (d) R.A. No. 1869 (the charter of the
Philippine Amusement and Gaming Corporation) on the ground that it is contrary to morals, public
policy, and order; 42 and (f) R.A. No. 6975, establishing the Philippine National
Police. 43
Other cases where we have followed a liberal policy regarding locus standi include those attacking the
validity or legality of (a) an order allowing the importation of rice in the light of the prohibition imposed
by R.A. No. 3452; 44 (b) P.D. Nos. 991 and 1033 insofar as they proposed amendments to the Constitution
and P.D. No. 1031 insofar as it directed the COMELEC to supervise, control, hold, and conduct the
referendum-plebiscite on 16 October 1976; 45 (c) the bidding for the sale of the 3,179 square meters of
land at Roppongi, Minato-ku, Tokyo, Japan; 46 (d) the approval without hearing by the Board of
Investments of the amended application of the Bataan Petrochemical Corporation to transfer the site of its
plant from Bataan to Batangas and the validity of such transfer and the shift of feedstock from naphtha
only to naphtha and/or liquefied petroleum gas; 47 (e) the decisions, orders, rulings, and resolutions of the
Executive Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of
Customs, and the Fiscal Incentives Review Board exempting the National Power Corporation from
indirect tax and duties; 48 (f) the orders of the Energy Regulatory Board of 5 and 6 December 1990 on the
ground that the hearings conducted on the second provisional increase in oil prices did not allow the
petitioner substantial cross-examination; 49 (g) Executive Order No. 478 which levied a special duty of
P0.95 per liter or P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil
products; 50 (h) resolutions of the Commission on Elections concerning the apportionment, by district, of
the number of elective members of Sanggunians;51 and (i) memorandum orders issued by a Mayor
affecting the Chief of Police of Pasay City. 52
In the 1975 case of Aquino vs. Commission on Elections, 53 this Court, despite its unequivocal ruling that
the petitioners therein had no personality to file the petition, resolved nevertheless to pass upon the issues
raised because of the far-reaching implications of the petition. We did no less in De Guia vs.
COMELEC 54 where, although we declared that De Guia "does not appear to have locus standi, a standing
in law, a personal or substantial interest," we brushed aside the procedural infirmity "considering the
importance of the issue involved, concerning as it does the political exercise of qualified voters affected
by the apportionment, and petitioner alleging abuse of discretion and violation of the Constitution by
respondent."
We find the instant petition to be of transcendental importance to the public. The issues it raised are of
paramount public interest and of a category even higher than those involved in many of the aforecited
cases. The ramifications of such issues immeasurably affect the social, economic, and moral well-being of
the people even in the remotest barangays of the country and the counter-productive and retrogressive
effects of the envisioned on-line lottery system are as staggering as the billions in pesos it is expected to
raise. The legal standing then of the petitioners deserves recognition and, in the exercise of its sound
discretion, this Court hereby brushes aside the procedural barrier which the respondents tried to take
advantage of.
And now on the substantive issue.
Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO from holding and
conducting lotteries "in collaboration, association or joint venture with any person, association, company
or entity, whether domestic or foreign." Section 1 provides:

Sec. 1. The Philippine Charity Sweepstakes Office. The Philippine Charity

Sweepstakes Office, hereinafter designated the Office, shall be the principal government
agency for raising and providing for funds for health programs, medical assistance and
services and charities of national character, and as such shall have the general powers
conferred in section thirteen of Act Numbered One thousand four hundred fifty-nine, as
amended, and shall have the authority:
A. To hold and conduct charity sweepstakes races, lotteries and other
similar activities, in such frequency and manner, as shall be determined,
and subject to such rules and regulations as shall be promulgated by the
Board of Directors.
B. Subject to the approval of the Minister of Human Settlements, to
engage in health and welfare-related investments, programs, projects and
activities which may be profit-oriented, by itself or in collaboration,
association or joint venture with any person, association, company or
entity, whether domestic or foreign, except for the activities mentioned in
the preceding paragraph (A), for the purpose of providing for permanent
and continuing sources of funds for health programs, including the
expansion of existing ones, medical assistance and services, and/or
charitable grants: Provided, That such investment will not compete with
the private sector in areas where investments are adequate as may be
determined by the National Economic and Development Authority.
(emphasis supplied)
The language of the section is indisputably clear that with respect to its franchise or privilege "to hold and
conduct charity sweepstakes races, lotteries and other similar activities," the PCSO cannot exercise it "in
collaboration, association or joint venture" with any other party. This is the unequivocal meaning and
import of the phrase "except for the activities mentioned in the preceding paragraph (A)," namely,
"charity sweepstakes races, lotteries and other similar activities."
B.P. Blg. 42 originated from Parliamentary Bill No. 622, which was covered by Committee Report No.
103 as reported out by the Committee on Socio-Economic Planning and Development of the Interim
Batasang Pambansa. The original text of paragraph B, Section 1 of Parliamentary Bill No. 622 reads as
follows:
To engage in any and all investments and related profit-oriented projects or programs and
activities by itself or in collaboration, association or joint venture with any person,
association, company or entity, whether domestic or foreign, for the main purpose of
raising funds for health and medical assistance and services and charitable grants. 55
During the period of committee amendments, the Committee on Socio-Economic Planning and
Development, through Assemblyman Ronaldo B. Zamora, introduced an amendment by substitution to
the said paragraph B such that, as amended, it should read as follows:
Subject to the approval of the Minister of Human Settlements, to engage in healthoriented investments, programs, projects and activities which may be profit- oriented, by
itself or in collaboration, association, or joint venture with any person, association,
company or entity, whether domestic or foreign, for the purpose of providing for

permanent and continuing sources of funds for health programs, including the expansion
of existing ones, medical assistance and services and/or charitable grants. 56
Before the motion of Assemblyman Zamora for the approval of the amendment could be acted upon,
Assemblyman Davide introduced an amendment to the amendment:
MR. DAVIDE.
Mr. Speaker.
THE SPEAKER.
The gentleman from Cebu is recognized.
MR. DAVIDE.
May I introduce an amendment to the committee
amendment? The amendment would be to insert after
"foreign" in the amendment just read the following:
EXCEPT FOR THE ACTIVITY IN LETTER (A)
ABOVE.
When it is joint venture or in collaboration with any
entity such collaboration or joint venture must not
include activity activity letter (a) which is the holding
and conducting of sweepstakes races, lotteries and other
similar acts.
MR. ZAMORA.
We accept the amendment, Mr. Speaker.
MR. DAVIDE.
Thank you, Mr. Speaker.
THE SPEAKER.
Is there any objection to the amendment? (Silence) The
amendment, as amended, is approved. 57
Further amendments to paragraph B were introduced and approved. When Assemblyman Zamora read the
final text of paragraph B as further amended, the earlier approved amendment of Assemblyman Davide
became "EXCEPT FOR THE ACTIVITIES MENTIONED IN PARAGRAPH (A)"; and by virtue of the
amendment introduced by Assemblyman Emmanuel Pelaez, the word PRECEDING was inserted before
PARAGRAPH. Assemblyman Pelaez introduced other amendments. Thereafter, the new paragraph B was
approved. 58
This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42.

No interpretation of the said provision to relax or circumvent the prohibition can be allowed since the
privilege to hold or conduct charity sweepstakes races, lotteries, or other similar activities is a franchise
granted by the legislature to the PCSO. It is a settled rule that "in all grants by the government to
individuals or corporations of rights, privileges and franchises, the words are to be taken most strongly
against the grantee .... [o]ne who claims a franchise or privilege in derogation of the common rights of the
public must prove his title thereto by a grant which is clearly and definitely expressed, and he cannot
enlarge it by equivocal or doubtful provisions or by probable inferences. Whatever is not unequivocally
granted is withheld. Nothing passes by mere implication." 59
In short then, by the exception explicitly made in paragraph B, Section 1 of its charter, the PCSO cannot
share its franchise with another by way of collaboration, association or joint venture. Neither can it
assign, transfer, or lease such franchise. It has been said that "the rights and privileges conferred under a
franchise may, without doubt, be assigned or transferred when the grant is to the grantee and assigns, or is
authorized by statute. On the other hand, the right of transfer or assignment may be restricted by statute or
the constitution, or be made subject to the approval of the grantor or a governmental agency, such as a
public utilities commission, exception that an existing right of assignment cannot be impaired by
subsequent legislation." 60
It may also be pointed out that the franchise granted to the PCSO to hold and conduct lotteries allows it to
hold and conduct a species of gambling. It is settled that "a statute which authorizes the carrying on of a
gambling activity or business should be strictly construed and every reasonable doubt so resolved as to
limit the powers and rights claimed under its authority." 61
Does the challenged Contract of Lease violate or contravene the exception in Section 1 of R.A. No. 1169,
as amended by B.P. Blg. 42, which prohibits the PCSO from holding and conducting lotteries "in
collaboration, association or joint venture with" another?
We agree with the petitioners that it does, notwithstanding its denomination or designation as a (Contract
of Lease). We are neither convinced nor moved or fazed by the insistence and forceful arguments of the
PGMC that it does not because in reality it is only an independent contractor for a piece of work, i.e., the
building and maintenance of a lottery system to be used by the PCSO in the operation of its lottery
franchise. Whether the contract in question is one of lease or whether the PGMC is merely an independent
contractor should not be decided on the basis of the title or designation of the contract but by the intent of
the parties, which may be gathered from the provisions of the contract itself. Animus hominis est anima
scripti. The intention of the party is the soul of the instrument. In order to give life or effect to an
instrument, it is essential to look to the intention of the individual who executed it. 62 And, pursuant to
Article 1371 of the Civil Code, "to determine the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered." To put it more bluntly, no one
should be deceived by the title or designation of a contract.
A careful analysis and evaluation of the provisions of the contract and a consideration of the
contemporaneous acts of the PCSO and PGMC indubitably disclose that the contract is not in reality a
contract of lease under which the PGMC is merely an independent contractor for a piece of work, but one
where the statutorily proscribed collaboration or association, in the least, or joint venture, at the most,
exists between the contracting parties. Collaboration is defined as the acts of working together in a joint
project. 63 Association means the act of a number of persons in uniting together for some special purpose
or business. 64 Joint venture is defined as an association of persons or companies jointly undertaking some
commercial enterprise; generally all contribute assets and share risks. It requires a community of interest
in the performance of the subject matter, a right to direct and govern the policy in connection therewith,

and duty,
losses. 65

which

may

be

altered

by

agreement

to

share

both

in

profit

and

The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had neither funds of its own
nor the expertise to operate and manage an on-line lottery system, and that although it wished to have the
system, it would have it "at no expense or risks to the government." Because of these serious constraints
and unwillingness to bear expenses and assume risks, the PCSO was candid enough to state in its RFP
that it is seeking for "a suitable contractor which shall build, at its own expense, all the facilities needed to
operate and maintain" the system; exclusively bear "all capital, operating expenses and expansion
expenses and risks"; and submit "a comprehensive nationwide lottery development plan . . . which will
include the game, the marketing of the games, and the logistics to introduce the game to all the cities and
municipalities of the country within five (5) years"; and that the operation of the on-line lottery system
should be "at no expense or risk to the government" meaning itself, since it is a government-owned
and controlled agency. The facilitiesreferred to means "all capital equipment, computers, terminals,
software, nationwide telecommunications network, ticket sales offices, furnishings and fixtures, printing
costs, costs of salaries and wages, advertising and promotions expenses, maintenance costs, expansion
and replacement costs, security and insurance, and all other related expenses needed to operate a
nationwide on-line lottery system."
In short, the only contribution the PCSO would have is its franchise or authority to operate the on-line
lottery system; with the rest, including the risks of the business, being borne by the proponent or bidder. It
could be for this reason that it warned that "the proponent must be able to stand to the acid test of proving
that it is an entity able to take on the role of responsible maintainer of the on-line lottery system." The
PCSO, however, makes it clear in its RFP that the proponent can propose a period of the contract which
shall not exceed fifteen years, during which time it is assured of a "rental" which shall not exceed 12% of
gross receipts. As admitted by the PGMC, upon learning of the PCSO's decision, the Berjaya Group
Berhad, with its affiliates, wanted to offer its services and resources to the PCSO. Forthwith, it organized
the PGMC as "a medium through which the technical and management services required for the project
would be offered and delivered to PCSO." 66
Undoubtedly, then, the Berjaya Group Berhad knew all along that in connection with an on-line lottery
system, the PCSO had nothing but its franchise, which it solemnly guaranteed it had in the General
Information of the RFP. 67 Howsoever viewed then, from the very inception, the PCSO and the PGMC
mutually understood that any arrangement between them would necessarily leave to the PGMC
the technical, operations, and management aspects of the on-line lottery system while the PCSO would,
primarily, provide the franchise. The words Gaming and Management in the corporate name of
respondent Philippine Gaming Management Corporation could not have been conceived just for
euphemistic purposes. Of course, the RFP cannot substitute for the Contract of Lease which was
subsequently executed by the PCSO and the PGMC. Nevertheless, the Contract of Lease incorporates
their intention and understanding.
The so-called Contract of Lease is not, therefore, what it purports to be. Its denomination as such is a
crafty device, carefully conceived, to provide a built-in defense in the event that the agreement is
questioned as violative of the exception in Section 1 (B) of the PCSO's charter. The acuity or skill of its
draftsmen to accomplish that purpose easily manifests itself in the Contract of Lease. It is outstanding for
its careful and meticulous drafting designed to give an immediate impression that it is a contract of lease.
Yet, woven therein are provisions which negate its title and betray the true intention of the parties to be in
or to have a joint venture for a period of eight years in the operation and maintenance of the on-line
lottery system.

Consistent with the above observations on the RFP, the PCSO has only its franchise to offer, while the
PGMC represents and warrants that it has access to all managerial and technical expertise to promptly
and effectively carry out the terms of the contract. And, for a period of eight years, the PGMC is under
obligation to keep all the Facilities in safe condition and if necessary, upgrade, replace, and improve them
from time to time as new technology develops to make the on-line lottery system more cost-effective and
competitive; exclusively bear all costs and expenses relating to the printing, manpower, salaries and
wages, advertising and promotion, maintenance, expansion and replacement, security and insurance, and
all other related expenses needed to operate the on-line lottery system; undertake a positive advertising
and promotions campaign for both institutional and product lines without engaging in negative
advertising against other lessors; bear the salaries and related costs of skilled and qualified personnel
for administrative and technical operations; comply withprocedural and coordinating rules issued by the
PCSO; and to train PCSO and other local personnel and to effect the transfer of technology and other
expertise, such that at the end of the term of the contract, the PCSO will be able to effectively take over
the Facilities and efficiently operate the on-line lottery system. The latter simply means that, indeed, the
managers, technicians or employees who shall operate the on-line lottery system are not managers,
technicians or employees of the PCSO, but of the PGMC and that it is only after the expiration of the
contract that the PCSO will operate the system. After eight years, the PCSO would automatically become
the owner of the Facilities without any other further consideration.
For these reasons, too, the PGMC has the initial prerogative to prepare the detailed plan of all games and
the marketing thereof, and determine the number of players, value of winnings, and the logistics required
to introduce the games, including the Master Games Plan. Of course, the PCSO has the reserved authority
to disapprove them. 68 And, while the PCSO has the sole responsibility over the appointment of dealers
and retailers throughout the country, the PGMC may, nevertheless, recommend for appointment dealers
and retailers which shall be acted upon by the PCSO within forty-eight hours and collect and retain, for its
own account, a security deposit from dealers and retailers in respect of equipment supplied by it.
This joint venture is further established by the following:
(a) Rent is defined in the lease contract as the amount to be paid to the PGMC as compensation for the
fulfillment of its obligations under the contract, including, but not limited to the lease of the Facilities.
However, this rent is not actually a fixed amount. Although it is stated to be 4.9% of gross receipts from
ticket sales, payable net of taxes required by law to be withheld, it may be drastically reduced or, in
extreme cases, nothing may be due or demandable at all because the PGMC binds itself to "bear all risks
if the revenue from the ticket sales, on an annualized basis, are insufficient to pay the entire prize money."
This risk-bearing provision is unusual in a lessor-lessee relationship, but inherent in a joint venture.
(b) In the event of pre-termination of the contract by the PCSO, or its suspension of operation of the online lottery system in breach of the contract and through no fault of the PGMC, the PCSO binds itself "to
promptly, and in any event not later than sixty (60) days, reimburse the Lessor the amount of its total
investment cost associated with the On-Line Lottery System, including but not limited to the cost of the
Facilities, and further compensate the LESSOR for loss of expected net profit after tax, computed over the
unexpired term of the lease." If the contract were indeed one of lease, the payment of the expected profits
or rentals for the unexpired portion of the term of the contract would be enough.
(c) The PGMC cannot "directly or indirectly undertake any activity or business in competition with or
adverse to the On-Line Lottery System of PCSO unless it obtains the latter's prior written consent." If the
PGMC is engaged in the business of leasing equipment and technology for an on-line lottery system, we
fail to see any acceptable reason why it should allow a restriction on the pursuit of such business.

(d) The PGMC shall provide the PCSO the audited Annual Report sent to its stockholders, and within two
years from the effectivity of the contract, cause itself to be listed in the local stock exchange and offer at
least 25% of its equity to the public. If the PGMC is merely a lessor, this imposition is unreasonable and
whimsical, and could only be tied up to the fact that the PGMC will actually operate and manage the
system; hence, increasing public participation in the corporation would enhance public interest.
(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the requirements of the
RFP, which it may, at its option, maintain as its initial performance bond required to ensure its faithful
compliance with the terms of the contract.
(f) The PCSO shall designate the necessary personnel to monitor and audit the daily performance of the
on-line lottery system; and promulgate procedural and coordinating rules governing all activities relating
to the on-line lottery system. The first further confirms that it is the PGMC which will operate the system
and the PCSO may, for the protection of its interest, monitor and audit the daily performance of the
system. The second admits the coordinating and cooperative powers and functions of the parties.
(g) The PCSO may validly terminate the contract if the PGMC becomes insolvent or bankrupt or is
unable to pay its debts, or if it stops or suspends or threatens to stop or suspend payment of all or a
material part of its debts.
All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit, operation,
conduct, and management of the On-Line Lottery System. They exhibit and demonstrate the parties'
indivisible community of interest in the conception, birth and growth of the on-line lottery, and, above all,
in its profits, with each having a right in the formulation and implementation of policies related to the
business and sharing, as well, in the losses with the PGMC bearing the greatest burden because of its
assumption of expenses and risks, and the PCSO the least, because of its confessed unwillingness to bear
expenses and risks. In a manner of speaking, each is wed to the other for better or for worse. In the final
analysis, however, in the light of the PCSO's RFP and the above highlighted provisions, as well as the
"Hold Harmless Clause" of the Contract of Lease, it is even safe to conclude that the actual lessor in this
case is the PCSO and the subject matter thereof is its franchise to hold and conduct lotteries since it is, in
reality, the PGMC which operates and manages the on-line lottery system for a period of eight years.
We thus declare that the challenged Contract of Lease violates the exception provided for in paragraph B,
Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore, invalid for being contrary to
law. This conclusion renders unnecessary further discussion on the other issues raised by the petitioners.
WHEREFORE, the instant petition is hereby GRANTED and the challenged Contract of Lease executed
on 17 December 1993 by respondent Philippine Charity Sweepstakes Office (PCSO) and respondent
Philippine Gaming Management Corporation (PGMC) is hereby DECLARED contrary to law and
invalid.
The Temporary Restraining Order issued on 11 April 1994 is hereby MADE PERMANENT.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 6217 December 26, 1911

CHARLES
W.
MEAD, plaintiff-appellant,
vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND CONSTRUCTION
COMPANY, defendant-appellants.
Haussermann,
Cohn
&
Fisher
and
A.
D.
James J. Peterson and O'Brien & DeWitt for defendant McCullough.

Gibbs

for

plaintiff.

TRENT, J.:
This action was originally brought by Charles W. Mead against Edwin C. McCullough, Thomas L.
Hartigan, Frank E. Green, and Frederick H. Hilbert. Mead has died since the commencement of the action
and the case is now going forward in the name of his administrator as plaintiff.
The complaint contains three causes of action, which are substantially as follows: The first, for salary; the
second, for profits; and the third, for the value of the personal effects alleged to have been left Mead and
sold by the defendants.
A joint and several judgment was rendered by default against each and all of the defendants for the sum
of $3,450.61 gold. The defendant McCullough alone having made application to have this judgment set
aside, the court granted this motion, vacating the judgment as to him only, the judgment as to the other
three defendants remaining undisturbed.1awphi1.net
At the new trial, which took place some two or three years later and after the death of Mead, the judgment
was rendered upon merits, dismissing the case as to the first and second causes of action and for the sum
of $1,200 gold in the plaintiff's favor on the third cause of action. From this judgment both parties
appealed and have presented separate bills of exceptions. No appeal was taken by the defendant
McCullough from the ruling of the court denying a recovery on his cross complaint.
On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is
otherwise stated) and the defendant organized the "Philippine Engineering and Construction Company,"
the incorporators being the only stockholders and also the directors of said company, with general
ordinary powers. Each of the stockholders paid into the company $2,000 mexican currency in cash, with
the exception of Mead, who turned over to the company personal property in lieu of cash.
Shortly after the organization, the directors held a meeting and elected the plaintiff as general manager.
The plaintiff held this position with the company for nine months, when he resigned to accept the position
of engineer of the Canton and Shanghai Railway Company. Under the organization the company began
business about April 1, 102.itc-alf
The contract and work undertaken by the company during the management of Mead were the wrecking
contract with the Navy Department at Cavite for the raising of the Spanish ships sunk by Admiral Dewey;
the contract for the construction of certain warehouses for the quartermaster department; the construction
of a wharf at Fort McKinley for the Government; The supervision of the construction of the Pacific
Oriental Trading Company's warehouse; and some other odd jobs not specifically set out in the record.
Shortly after the plaintiff left the Philippine Islands for China, the other directors, the defendants in this
case, held a meeting on December 24, 1903, for the purpose of discussing the condition of the company at

that time and determining what course to pursue. They did on that date enter into the following contract
with the defendant McCullough, to wit:1awphil.net
For value received, this contract and all the rights and interests of the Philippine Engineering and
construction Company in the same are hereby assigned to E. C. McCullough of Manila, P. I.
(Sgd.)
President,
Construction Company.

E.
Philippine

(Sgd.)
F.
(Sgd.) THOMAS L. HARTIGAN, Secretary.

C.
Engineering

E.

McCULLOUGH,
and

GREEN, Treasurer.

The contract reffered to in the foregoing document was known as the wrecking contract with the naval
authorities.
On the 28th of the same month, McCullough executed and signed the following instrumental:
For value received, and having the above assignment from my associates in the Philippine
Engineering and Construction Company, I hereby transfer my right, title, and interest in the
within contract, with the exception of one sixth, which I hereby retain, to R. W. Brown, H. D. C.
Jones, John T. Macleod, and T. H. Twentyman.
The assignees of the wrecking contract, including McCullough, formed was not known as the "Manila
Salvage Association." This association paid to McCullough $15,000 Mexican Currency cash for the
assignment of said contract. In addition to this payment, McCullough retained a one-sixth interest in the
new company or association.
The plaintiff insists that he was received as general manager of the first company a salary which was not
to be less than $3,500 gold (which amount he was receiving as city engineer at the time of the corporation
of the company), plus 20 per cent of the net profits which might be derived from the business; while
McCullough contends that the plaintiff was to receive only his necessary expenses unless the company
made a profit, when he could receive $3,500 per year and 20 per cent of the profits. The contract entered
into between the board of directors and the plaintiffs as to the latter's salary was a verbal one. The
plaintiff testified that this contract was unconditional and that his salary, which was fixed at $3,500 gold,
was not dependent upon the success of the company, but that his share of the profits was to necessarily
depend upon the net income. On the other hand, McCullough, Green and Hilbert testify that the salary of
the plaintiff was to be determined according to whether or not the company was successful in its
operations; that if the company made gains, he was to receive $3,5000 gold, and a percentage, but that if
the company did not make any profits, he was to receive only his necessary living expenses.
It is strongly urged that the plaintiff would not have accepted the management of the company upon such
conditions, as he was receiving from the city of Manila a salary of $3,500 gold. This argument is not only
answered by the positive and direct testimony of three of the defendants, but also by the circumstances
under which this company was organized and principal object, which was the raising of the Spanish ships.
The plaintiff put no money into the organization, the defendants put but little: just sufficient to get the
work of raising the wrecks under way. This venture was a risky one. All the members of the company
realized that they were undertaking a most difficult and expensive project. If they were successful,
handsome profits would be realized; while if they were unsuccessful, all the expenses for the hiring of
machinery, launches, and labor would be a total loss. The plaintiff was in complete charge and control of

this work and was to receive, according to the great preponderance of the evidence, in case the company
made no profits, sufficient amount to cover his expenses, which included his room, board, transportation,
etc. The defendants were to furnish money out of their own private funds to meet these expenses, as the
original $8,000 Mexican currency was soon exhausted in the work thus undertaken. So the contract
entered into between the directors and the plaintiff as to the latter's salary was a contingent one.
It is admitted that the plaintiff received $1.500 gold for his services, and whether he is entitled to receive
an additional amount depends upon the result of the second cause of action.
The second cause of action is more difficult to determine. On this point counsel for the plaintiff has filed a
very able and exhaustive brief, dealing principally with the facts.
It is urged that the net profits accruing to the company after the completion of all the contracts (except the
salvage contract) made before the plaintiff resigned as manager and up to the time the salvage contract
was transferred to McCullough and from him to the new company, amounted to $5,628.37 gold. This
conclusion is reached, according to the memorandum of counsel for the plaintiff which appears on pages
38 and 39 of the record, in the following manner:
Profits from the construction of warehouses for the $6,962.54
Government
Profits from the construction of the wall at Fort 500.00
McKinley
Profits from the inspection of the construction of the 1,000.00
P. O. T. warehouse
Profits obtained from the projects (according to 1,000.00
Mead's calculations)
Total

9,462.54

In this same memorandum, the expense for the operation of the company during Mead's management,
consisting of rents, the hire of one muchacho, the publication of various notices, the salary of an engineer
for four months, and plaintiff's salary for nine months, amounts to $3,834.17 gold. This amount, deducted
from the sum total of profits, leaves $5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they assert that the company, after paying all
expenses and indebtedness, had a considerable balance to its credit, calls attention to Exhibit K. This
balance reads as follows:
Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction
Company.
Then follow the debits and credits, with a balance in favor of the company of $10,728.44 Mexican
currency. This account purports to cover the period from July 1, 1902, to April 1, 1903. Ledger No. 3,
above mentioned, is that the defendant McCullough and not one of the books of the company.

It was this exhibit that the lower court based its conclusion when it found that on January 25, 1903, after
making the transfer of the salvage contract to McCullough, the company was in debt $2,278.30 gold. The
balance of $10,728.44 Mexican currency deducted from the $16,439.40 Mexican currency (McCullough's
losses in the Manila Salvage Association) leaves $2,278.30 United States currency at the then existing
rate of exchange. In Exhibit K, McCullough charged himself with the $15,000 Mexican currency which
he received from his associates in the new company, but did not credit himself with the $16,439.40
Mexican currency, losses in said company, for the reason that on April 1, 1903, said losses had not
occurred. It must be borne in mind that Exhibit K is an abstract from a ledger.
The defendant McCullough, in order to show in detail his transactions with the old company, presented
Exhibits 1 and 2. These accounts read as follows:
Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine
Engineering and Construction Company.
Then follow the debits ad credits. These two accounts cover the period from March 5 1902, to June 9,
1905. According to Exhibit No. 1, the old company was indebted to McCullough in the sum of
$14,918.75 Mexican currency, and according to Exhibit No. 2 he indebtedness amounted to $6,358.15
Mexican currency. The debits and credits in these two exhibits are exactly the me with the following
exceptions; I Exhibit No. 1, McCullough credits himself with the $10,000 Mexican currency (the amount
borrowed from the bank and deposited with the admiral as a guarantee for the faithful performance of the
salvage contract); while in Exhibit No. 2 he credits himself with this $10,000 and at he same time charges
himself with this amount. In the same exhibit (No. 2) he credits himself with $16,439.40 Mexican
currency, his losses in the new company, received from said company. Eliminating entirely from these
two exhibits the $10,000 Mexican currency, the $15,000 Mexican currency, and the $16,39.40 Mexican
currency, the balance shown in McCullough's favor is exactly the same in both exhibits. This balance
amounts to $4,918.75 Mexian currency.
According to McCullough's accounts in Exhibits 1 and 2 the profits derived from the construction of the
Government warehouse amounted to $4,005.02 gold, while the plaintiff contends that these profits
amounted to $6,962.54 gold. The plaintiff, during his management of the old company, made a contract
with the Government for the construction of these are house and commenced work. After he resigned and
left for China, McCullough took charge of and completed the said warehouse. McCullough gives a
complete, detailed statements of express for the completion of this work, showing the dates, to whom
paid, and for what purpose. He also gives the various amounts he received from the Government with the
amounts of the receipt of the same. On the first examination, McCullough testified that the total amount
received from the Government for the construction of these warehouse was $1,123 gold. The case was
suspended for the purpose of examination the records of the Auditor and the quater master, to determine
the exact amount paid for this work. As a result of this examination, the vouchers show an additional
amount of about $5,000 gold, paid in checks. These checks show that the same were endorsed by the
plaintiff and collected by him from the Hongkong and Shanghai Banking Corporation. This money was
not handled by McCullough and as it was collected by the plaintiff, it must be presumed, in the absence of
proof, that it was disbursed by him. McCullough did not charge himself with the $2,5000 gold, alleged to
have been profits from the construction of the wall at Fort McKinley, the inspection of the construction of
the P. O. T. warehouse, and other projects. This work was done under the management of the plaintiff and
it is not shown that the profits from these contracts ever reached the ands of McCullough. McCullough
was not the treasurer of the company at that time. The other items which the plaintiff insist that
McCullough had no right to credit himself with are the following:

Date

To whom paid.

Amount (Mex. currency).

Jan. 30, 1903

Green

$2,000.00

Feb. 2, 1903

McCullough

1,300.00

Feb. 2, 1903

Green

1,027.92

Feb. 19, 1905

P. O. T. Co. note

2,236.80

May 23, 1905

Hilbert

1,856.02

June 9, 1905

Hartigan

1,225.00

McCullough says that these amounts represents cash borrowed from the evidence parties to carry on the
operations of the old company while it was trying to raise the sunken vessels. There is no proof to the
contrary, and McCullough's testimony on this point is strongly corroborated by the fact that the work
done by the company in attempting to raise theses vessels was it first undertaking. The company had
made no profits while tat work was going on under the management of the plaintiff, but its expenses
greatly exceeded that of the original $8,000 Mexican currency. It was necessary to borrow money to
continue that work. These amounts, having been borrowed, were outstanding debts when McCullough
took charge for the purpose of completing the warehouses and winding up the business of the old
company. These amounts do not represent payments or refunds of the original capital. McCullough did
not credit himself with any amount for his services for supervising the completion of the warehouses, nor
for liquidating or winding up the company's affairs. We think that the amount of $4,918.75 Mexican
currency, balance in McCullough's favor up to this point, represents a fair, equitable, and just settlement.
So far we have referred to the Philippine Engineering and Construction Company as the "company,"
without any attempt to define its legal status.
The plaintiff and defendants organized this company with a capital stock of $100,000 Mexican currency,
each paying in on the organization $2,000 Mexican currency. The remainder, $9,000, according to the
articles of agreement, were to be offered to the public in shares of $100 Mexican currency, each. The
names of all the organizers appear in the articles of agreement, which articles were duly inscribed in the
commercial register. The purpose for which this organization was affected were to engage in general
engineering and construction work, and operating under the name of the "Philippine Engineering and
Construction Company." during its active existence, it engaged in the business of attempting to rise the
sunken Spanish fleet, constructing under contract warehouses and a wharf for the United States
Government, supervising the construction of a warehouse for a private firm, and some assay work. It was,
therefore, an industrial civil partnership, as distinguished from a commercial one; a civil partnership in
the mercantile form, an anonymous partnership legally constituted in the city of Manila.
The articles of agreement appeared in a public document and were duly inscribed in the commercial
register. To the extent of this inscription the corporation partook of the form of a mercantile one and as
such must e governed by articles 151 to 174 of the Code of Commerce, in so far as these provisions are
not in conflict with the Civil Code (art. 1670, Civil Code); but the direct and principal law applicable is
the Civil Code. Those provisions of the Code of Commerce are applicable subsidiary.
This partnership or stock company (sociedad anonima) upon the execution of the public instrument in
which is articles of agreement appear, and the contribution of funds and personal property, became a
juridicial person an artificial being, invisible, intangible and existing only in contemplation of law

with the power to hold, buy, and ell property, and to use and be sued a corporation not a general
copartnership nor a limited copartnership. (Arts. 37, 38,1656 of the Civil Code; Compania Agricola de
Ultimar vs. Reyes et al., 4 Phil. Rep., 2; and Chief Justice Marshall's definition of a corporation, 17 U. S.,
518.)
The inscribing of its articles of agreement in the commercial register was not necessary to make it a
juridicial person a corporation. Such inscription only operated to show that it partook of the form of a
commercial corporation. (Compania Agricola de Ultimar vs. Reyes et al., supra.)
Did a majority of the stockholders, who were at the same time a majority of the directors of this
corporation, have the power under the law and its articles of agreement, to sell or transfer to one of its
members the assets of said corporation?
In the first article of the statutes of incorporation it is stated tat by virtue of a public document the
organizers, whose names are given in full, agreed to form a sociedad anonima. Article II provides that the
organizers should be the directors an administrators until the second general meeting, and until their
successors were duly elected and installed. The third provides that the sociedad should run for ninety-nine
years from the date of the execution of its articles of agreement. Article IV sets forth the object or purpose
of the organization. Article V makes the capital $100,000 Mexican currency, divided into one thousand
shares at $100 Mexican currency each. Article VI provides that each shareholder should be considered as
a coowner in the assets of the company and entitled to participate in the profits in proportion to the
amount of his stock. Article VII fixed the time of holding general meetings and the manner of calling
special meetings of the stockholders. Article VIII provides that the board of directors shall be elected
annually. Article IX provides for the filing of vacancies in the board of directors. Article X provides that
"the board of directors shall elect the officers of the sociedadand have under is charge the administration
of the said sociedad." Article XI: "In all the questions with reference to the administration of the affairs of
the sociedad, it shall be necessary to secure the unanimous vote of the board of directors, and at least
three of said board must be provides that all of the stock, except that which was divided among the
organizers should remain in the treasury subject to the disposition of the board of directors. Article XIII
reads: "In all the meetings of the stockholders, a majority vote of the stockholders present shall be
necessary to determine any question discussed." The fourteenth articles authorizes the board of directors
to adopt such rules and regulations for the government of the sociedadas it should deem proper, which
were not in conflict with its statutes.
When the sale or transfer heretofore mentioned took place, there were present four directors, all of whom
gave their consent to that sale or transfer. The plaintiff was then about and his express consent to make
this transfer or sale was not obtained. He was, before leaving, one of the directors in this corporation, and
although he had resigned as manager, he had not resigned as a director. He accepted the position of
engineer of the Canton and Shanghai Railway Company, knowing that his duties as such engineer would
require his whole time and attention and prevent his returning to the Philippine Islands for at least a year
or more. The new position which he accepted in China was incompatible with his position as director in
the Philippine Engineering and Construction Company, a corporation whose sphere of operations was
limited to the Philippine Islands. These facts are sufficient to constitute an abandoning or vacating of hid
position as director in said corporation. (10 Cyc., 741.) Consequently, the transfer or sale of the
corporation's assets to one of its members was made by the unanimous consent of all the directors in the
corporation at that time.
There were only five stockholders in this corporation at any time, four of whom were the directors who
made the sale, and the other the plaintiff, who was absent in China when the said sale took place. The sale
was, therefore, made by the unanimous consent of four-fifths of all the stockholders. Under the articles of

incorporation, the stockholders and directors had general ordinary powers. There is nothing in said
articles which expressly prohibits the sale or transfer of the corporate property to one of the stockholders
of said corporation.
Is there anything in the law which prohibits such a sale or transfer? To determine this question, it is
necessary to examine, first, the provisions of the Civil Code, and second, those provisions (art. 151 to
174) of the Code o ] Commerce.
Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is
nothing in these articles which expressly or impliedly prohibits the sale of corporate property to one of its
members, nor a dissolution of a corporation in this manner. Neither is there anything in articles 151 to
174 of the Code of Commerce which prohibits the dissolution of a corporation by such sale or transfer.
The articles of incorporation must include:

The submission to the vote of the majority of the meeting of members, duly called and held, of
such matters as may properly be brought before the same. (No. 10, art. 151, Code of Commerce.)
Article XIII of the corporation's statutes expressly provides that "in all the meetings of the stockholders, a
majority vote of the stockholders present shall be necessary to determine any question discussed."
The sale or transfer to one of its members was a matter which a majority of the stockholders could very
properly consider. But it i said that if the acts and resolutions of a majority of the stockholders in a
corporation are binding in every case upon the minority, the minority would be completely wiped out and
their rights would be wholly at the mercy of the abuses of the majority.
Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without such a
limit the will of the majority would be absolute and irresistible and might easily degenerate into an
arbitrary tyranny. The reason for these limitations is that in every contract of partnership (and a
corporation can be something fundamental and unalterable which is beyond the power of the majority of
the stockholders, and which constitutes the rule controlling their actions. this rule which must be observed
is to be found in the essential compacts of such partnership, which gave served as a basis upon which the
members have united, and without which it is not probable that they would have entered not the
corporation. Notwithstanding these limitations upon the power of the majority of the stockholders, their
(the majority's) resolutions, when passed in good faith and for a just cause, deserve careful consideration
and are generally binding upon the minority.
Eixala, in his work entitled "Instituciones del Derecho Mercantil de Espaa," speaking of sociedades
anonimas, says:
The resolutions of the boards passed by a majority vote are valid . . . and authority for passing
such resolutions is unlimited, provided that the original contract is not broken by them, the
partnership funds not devoted to foreign purposes, or the partnerships transformed, or changes
made which are against public policy or which infringe upon the rights of third persons.
The supreme court of Spain, in its decision dated June 30, 1888, said:

In order to be valid and binding upon dissenting members, it s an indispensable requisite that
resolutions passed by a general meeting of stockholders conform absolutely to the contracts and
conditions of the articles of the association, which are to be strictly construed.
That resolutions passed within certain limitations by a majority of the stockholders of a corporation are
binding upon the minority, is therefore recognized by the Spanish authorities.
Power of private corporation to alienate property. This power of absolute alienability of
corporate property applies especially to private corporations that are established solely for the
purpose of trade or manufacturing and in which he public has no direct interest. While this power
is spoken of as belonging to the corporation it must be observed that the authorities point out that
the trustees or directors of a corporation do not possess the power to dispose of the corporate
property so as to virtually end the existence of the corporation and prevent it from carrying on the
business for which it was incorporated. (Thompson on Corporation, second edition, sec. 2416,
and cases cited thereunder.)
Power to dispose of all property. Where there are no creditors, and no stockholder objects, a
corporation, as against all other persons but the state, may sell and dispose of all its property. The
state in its sovereign capacity may question the power of the corporation to do so, but with these
exceptions such as a sale is void. A rule of general application is that a corporation of a purely
private business character, one which owes no special duty to the public, and is not given the
right of eminent domain, where exigencies of its business require it or when the circumstances are
such that it can no longer continue the business with profit, may sell and dispose of all its
property, pay its debts, divide the remaining assets and wind up the affairs of the corporation.
(Id., sec. 2417.)
When directors or officers may dispose of all the property. It is within the dominion of the
managing officers and agents of the corporation to dispose of all the corporate property under
certain circumstances; and this may be done without reference to the assent or authority of the
stockholders. This disposition of the property may be temporarily by lease, or permanently by
absolute conveyance. But it can only be done in the course of the corporate business and for the
furtherance of the purposes of the incorporation. The board of directors possess this power when
the corporation becomes involved and by reason of its embarrassed or insolvent condition is
unable either to pay its debts or to secure capital and funds for the further prosecution of its
enterprise, and especially where creditors are pressing their claims and demands and are
threatening to or have instituted actions to enforce their claims. This power of the directors to
alienate the property is conceded where it is regarded as of imperative necessity. (If., sec. 2418,
and case cited.)
When majority stockholder may dispose of all corporate property. Another rule that permits a
majority of the stockholders to dispose of all the corporate property and wind up the business, is
where the corporation has became insolvent, and the disposition of the property is necessary to
pay the debt; or where from any cause the business is a failure, and the best interest of the
corporation and all the stockholders require it, then the majority have clearly the power to dispose
of all the property even as against the protests of a minority. It would be a harsh rule that could
permit one stockholder, or any minority of the stockholders, to hold the majority to their
investment where the continuation of the business would be at a loss and where there was no
prospect or hope that the enterprise could be made profitable. The rule as stated by some courts is
that the majority stockholders may dispose of the property when just cause exists; and this just
cause is usually defined to be the unprofitableness of the business and where its continuation

would be ruinous to the corporation and against the interest of stockholders. (Id., sec. 2424, and
cases cited.)
Nothing is better settled in the law of corporations than the doctrine that a corporation has the
same capacity and power as a natural person to dispose of the convey its property, real or
personal, provided it does not do so for a purpose which is foreign to the objects for which it was
created, and provided, further, it violates no charter or statutory restriction, on rule of law based
upon public policy. . . .This power need not be expressly conferred upon a corporation by its
charter. It is implied as an incident to its ownership of property, unless there is some clear
restriction in this charter or in some statute. (Clark and Marshall's Private Corporations, sec. 152,
and cases cited.)
A purely private business corporation, like a manufacturing or trading company, which is not
given the right of eminent domain, and which owes no special duties to the public, may certainly
sell and convey absolutely the whole of its property, when the exigencies of its business require it
to do so, or when the circumstances are such that it can no longer profitably continue its business,
provided the transaction is not in fraud of the rights of creditors, or in violation of charter or
statutory restrictions. And, by the weight of authority, this may be done a majority of the
stockholders against the dissent of the minority. (Id., sec. 160, and cases cited.)
The above citations are taken from the works of the most eminent writers on corporation law. The citation
of cases in support of the rules herein announced are too numerous to insert.
From these authorities it appears to be well settled, first, that a private corporation, which owes no special
duty to the public and which has not been given the right of eminent domain, has the absolute right and
power as against the whole world except the state, to sell and dispose of all of its property; second, that
the board of directors, has the power, without referrence to the assent or authority of the stockholders,
when the corporation is in failing circumstances or insolvent or when it can no longer continue the
business with profit, and when it is regarded as an imperative necessity; third, that a majority of the
stockholders or directors, even against the protest of the minority, have this power where, from any cause,
the business is a failure and the best interest of the corporation and all the stockholders require it.
May officer or directors of the corporation purchase the corporate property? The authorities are not
uniform on this question, but on the general proposition whether a director or an officer may deal with the
corporation, we think the weight of authority is that he may. (Merrick vs. Peru Coal Co., 61 Ill., 472;
Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick Oil Company vs. Marbury, 91 U.S., 587; Whitwell
vs, Warner, 20 Vt., 425; Smith vs. Lansing, 22 N.Y., 520; City of St. Loius vs. Alexander, 23 Mo., 483;
Beach et al vs. Miller, 130 Ill., 162.)
While a corporation remains solvent, we can see no reason why a director or officer, by the authority of a
majority of the stockholders or board of managers, may not deal with the corporation, loan it money or
buy property from it, in like manner as a stranger. So long as a purely private corporation remains solvent,
its directors are agents or trustees for the stockholders. They owe no duties or obligations to others. But
the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether
they are members of the corporation or not, and must manage its property and assets with strict regard to
their interest; and if they are themselves creditors while the insolvent corporation is under their
management, they will not be permitted to secure to themselves by purchasing the corporate property or
otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in good
faith and for an adequate consideration purchase from a majority of the directors or stockholders the
property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the

minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7
Wall., 299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire Insurance
Company, 43 N. H., 263; Morawetz on Corporations (first edition), sec. 579; Haywood vs. Lincoln
Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage
Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complaint was a corporation organized
under the laws of West Virginia, engaged in the business of raising and selling petroleum. It became very
much embarrased and a note was given secured by a deed of trust, conveying all the property rights, and
franchise of the corporation to William Thomas to secure the payment of said note, with the usual power
of sale in default of payment. The property was sold under the deed of trust; was bought in by defendant's
agent for his benefit, and conveyed to him the same year. The defendant was at the time of these
transactions a stockholder and director in the company. At the time the defendant's money became due
there was no apparent possibility of the corporation's paying it at any time. The corporation was then
insolvent. The property was sold by the trustee and bough in by the defendant at a fair and open sale and
at a reasonable price. The sale and purchase was the only mode left to the defendant to make his money.
The court said:
That a director of a joint-stock corporation occupies one of those fiduciary relations where his
dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose
interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on
slight grounds, is a doctrine founded on the soundest morality, and which has received the
clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7
Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553;
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in regard
to contracts of this class, is, not that they are absolutely void, but that they are voidable at the
election of the party whose interest has been so represented by the party claiming under it. We
say, this is the general rule; for there may be cases where such contracts would be void ab initio;
as when an agent to sell buys of himself, and by his power of attorney conveys to himself that
which he was authorized to sell. but even here, acts which amount t a ratification by the principal
may validate the sale.
The present case is not one of that class. While it is true that the defendant, a s a director of the
corporation, was bound by all those rules of conscientious fairness which courts of equity have
imposed as the guides for dealing in such cases, it can not be maintained that any rule forbids one
director among several from loaning money to the corporation when the money is needed, and the
transaction is open, and otherwise free from blame. No adjudged case has gone so far as this.
Such a doctrine, while it would afford little protection to the corporation against actual fraud or
oppression, would deprive it of the air of those most interested in giving aid judiciously, and best
qualified to judge of the necessity of that aid, and of the extent to which it may safely be given.
There are in such a transaction three distinct parties whose interest is affected by it; namely, the
lender, the corporation, and the stockholders of the corporation.
The directors are the officers or agents of the corporation, and represent the interests of the
abstract legal entity, and of those who own the shares of its stock. One of the objects of creating a
corporation by law is to enable it to make contracts; and these contracts may be made with its
stockholders as well as with others. In some classes of corporations, as in mutual insurance
companies, the main object of the act of the incorporation is to enable the company to make
contracts which its stockholders, or with persons who become stockholders by the very act of

making the contract of insurance. It is very true, that as a stockholder, in making a contract of any
kind with the corporation of which he is a member, is in some sense dealing with a creature of
which he is a part, and holds a common interest with the other stockholders, who, with him,
constitute the whole of that artificial entity, he is properly held to a larger measure of candor and
good faith than if he were not a stockholder. So, when the lender is a director, charged, with
others, with the control and management of the affairs of the corporation, representing in this
regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a
contract with the company, to candor and fair dealing, is increased in the precise degree that his
representative character has given him power and control derived from the confidence reposed in
him by the stockholders who appointed him their agent. If he should be a sole director, or one of a
smaller number vested with certain powers, this obligation would be still stronger, and his acts
subject to more severe scrutiny, and their validity determined by more rigid principles of
morality, and freedom from motives of selfishness. All this falls far short, however, of holding
that no such contract can be made which will be valid; . . . .
In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:
As a strictly legal question, the right of a board of directors of a corporation to apply it property to
the payment of its debts, and the right of the majority of stockholders present at a meeting called
for the purpose to ratify such action and to dissolve the corporation, can not be questioned.
But were such action is taken at the instance, and through the influence of the president of the
corporation, and were the debt to which the property is applied is one for which he is himself
primarily liable, and specially where he subsequently acquires, in his personal right, the proerty
thus disposed of, such circumstances undoubtedly subject his acts to severe scrutiny, and oblige
him to establish that he acted with the utmost candor and fair-dealing for the interest of the
corporation, and without taint of selfish motive.
The sale or transfer of the corporate property in the case at bar was made by three directors who were at
the same time a majority of stockholders. If a majority of the stockholders have a clear and a better right
to sell the corporate property than a majority of the directors, then it can be said that a majority of the
stockholders made this sale or transfer to the defendant McCullough.
What were the circumstances under which said sale was made? The corporation had been going from bad
to worse. The work of trying to raise the sunken Spanish fleet had been for several months abandoned.
The corporation under the management of the plaintiff had entirely failed in this undertaking. It had
broken its contract with the naval authorities and the $10,000 Mexican currency deposited had been
confiscated. It had no money. It was considerably in debt. It was a losing concern and a financial failure.
To continue its operation meant more losses. Success was impossible. The corporation was civilly dead
and had passed into the limbo of utter insolvency. The majority of the stockholders or directors sold the
assets of this corporation, thereby relieving themselves and the plaintiff of all responsibility. This was
only the wise and sensible thing for them to do. They acted in perfectly good faith and for the best
interests of all the stockholders. "It would be a harsh rule that would permit one stockholder, or any
minority of stockholders to hold a majority to their investment where a continuation of the business
would be at a loss and where there was no prospect or hope that the enterprise would be profitable."
The above sets forth the condition of this insolvent corporation when the defendant McCullough proposed
to the majority of stockholders to take over the assets and assume all responsibility for the payment of the
debts and the completion of the warehouses which had been undertaken. The assets consisted of office
furniture of a value of less than P400, the uncompleted contract for the construction of the Government

warehouses, and the wrecking contract. The liabilities amounted to at least $19,645.74 Mexican currency.
$9,645.74 Mexican currency of this amount represented borrowed money, and $10,000 Mexican currency
was the deposit with the naval authorities which had been confiscated and which was due the bank.
McCullough's profits on the warehouse contract amounted to almost enough to the pay the amounts which
the corporation had borrowed from its members. The wrecking contract which had been broken was of no
value to the corporation for the reason that the naval authorities absolutely refused to have anything
further to do with the Philippine Engineering and Construction Company. They the naval authorities) had
declined to consider the petition of the corporation for an extension in which to raise the Spanish fleet,
and had also refused to reconsider their action in confiscating the deposit. They did agree, however, that if
the defendant McCullough would organize a new association, that they would give the new concern an
extension of time and would reconsider the question of forfeiture of the amount deposited. Under these
circumstances and conditions, McCullough organized the Manila Salvage Company, sold five-sixth of
this wrecking contract to the new company for $15,000 Mexican currency and retained one-sixth as his
share of the stock in the new concern. The Manila Salvage company paid to the bank the $10,000
Mexican currency which had been borrowed to deposit with the naval authorities, and began operations.
All of the $10,000 Mexican currency so deposited was refund to the new company except P2,000. The
new association failed and McCullough, by reason of this failure, lost over $16,000 Mexican currency.
These facts show that McCullough acted in good faith in purchasing the old corporation's assets, and that
he certainly paid for the same a valuable consideration.
But cancel for the plaintiff say: "The board of directors possessed only ordinary powers of administration
(Article X of the Articles of incorporation), which in no manner empowered it either to transfer or to
authorize the transfer of the assets of the company to McCullough (art. 1773, Civil Code; decisions of the
supreme court of Spain of April 2, 1862, and July 8, 1903)."
Article X of the articles of incorporation above referred to provides that the board of directors shall elect
the officers of the corporation and "have under its charge the administration of the said corporation."
Articles XI reads: "In all the questions with reference to the administration of the affairs of the
corporation, it shall be necessary to secure the unanimous vote of the board of directors, and at least three
of said board must be present in order to constitute a legal meeting." It will be noted that article X statute
a legal meeting." It will be noted that Article X placed the administration of the affairs of the corporation
in the hands of the board of directors. If Article XI had been omitted, it is clear that under the rules which
govern business of that character, and in view of the fact that before the plaintiff left this country and
abandoned his office as director, there were only five directors in the corporation, then three would have
been sufficient to constitute a quorum and could perform all the duties and exercise all the powers
conferred upon the board under this article. It would not have been necessary to obtain the consent of all
three of such members which constituted the quorum in order that a solution affecting the administration
of the corporation should be binding, as two votes a majority of the quorum would have been
sufficient for this purpose. (Buell vs. Buckingham & Co., 16 Iowa, 284; 2 Kent. Com., 293; Cahill vs.
Kalamazoo Mutual Insurance Company, 2 Doug. (Mich.), 124; Sargent vs. Webster, 13 Met., 497; In
re Insurance Company, 22 Wend., 591; Ex parte Wilcox, 7 Cow., 402; id., 527, note a.)
It might appear on first examination that the organizers of this corporation when they asserted the first
part of Article XI intended that no resolution affecting the administration of the affairs should be binding
upon the corporation unless the unanimous consent of the entire board was first obtained; but the reading
of the last part of this same article shows clearly that the said organizers had no such intention, for they
said: "At least three of said board must be present in order to constitute a legal meeting." Now, if three
constitute a legal meeting, three were sufficient to transact business, three constituted the quorum, and,
under the above-cited authorities, two of the three would be sufficient to pass binding resolutions relating
to the administration of the corporation.

If the clause "have under in charge and administer the affairs of the corporation" refers to the ordinary
business transactions of the corporation and does not include the power to sell the corporate property and
to dissolve the corporation when it becomes insolvent a change we admit organic and fundamental
then the majority of the stockholders in whom the ultimate and controlling power lies must surely have
the power to do so.
Article 1713 of the Civil Code reads:
An agency stated in general terms only includes acts of administration.
In order to compromise, alienate, mortgage, or execute any other act of strict ownership an
express commission is required.
This article appears in title 9, chapter 1 of the Civil Code, which deals with the character, form, and kind
of agency. Now, were the positions of Hilbert, Green, Hartigan, and McCullough that the agents within
the meaning of the article above quoted when the assets of the corporation were transferred or sold to
McCullough? If so, it would appear from said article that in order to make the sale valid, an express
commission would be required. This provision of law is based upon the broad principles of sound reason
and public policy. There is a manifest impropriety in allowing the same person to act as the agent of the
seller and to become himself the buyer. In such cases, there arises so often a conflict between duty and
interest. "The wise policy of the law put the sting of a disability into the temptation, as a defensive
weapon against the strength of the danger which lies in the situation."
Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the assets of the
insolvent corporation was made, but they were also directors and stockholders. In addition to being a
creditor, McCullough sustained the corporation the double relation of a stockholder and president. The
plaintiff was only a stockholder. He would have been a creditor to the extent of his unpaid salary if the
corporation had been a profitable instead of a losing concern.
But as we have said when the sale or transfer under consideration took place, there were three directors
present, and all voted in favor of making this sale. It was not necessary for the president, McCullough, to
vote. There was a quorum without him: a quorum of the directors, and at the same time a majority of the
stockholders.
A corporation is essential a partnership, except in form. "The directors are the trustees or managing
partners, and the stockholders are the cestui que trust and have a joint interest in all the property and
effects of the corporation." (Per Walworth, Ch., in Robinson vs. Smith, 3 Paige, 222, 232; 5 idem, 607;
Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)
The Philippine Engineering and Construction Company was an artificial person, owning its property and
necessarily acting by its agents; and these agents were the directors. McCullough was then an agent or a
trustee, and the stockholders the principal. Or say (as corporation was insolvent) that he was an agent or
trustee and the creditors were the beneficiaries. This being the true relation, then the rules of the law (art.
1713 of the Civil Code) applicable to sales and purchases by agents and trustees would not apply to the
purchase in question for the reason that there was a quorum without McCullough, and for the further
reason that an officer or director of a corporation, being an agent of an artificial person and having a joint
interest in the corporate property, is not such an agent as that treated of in article 1713 of the Civil Code.
Again, McCullough did not represent the corporation in this transaction. It was represented by a quorum
of the board of directors, who were at the same time a majority of the stockholders. Ordinarily,

McCullough's duties as president were to preside at the meetings, rule on questions of order, vote in case
of a tie, etc. He could not have voted in this transaction because there was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in view of the relations which
they bore to the corporation, are subject to the most severe scrutiny. They are obliged to establish that
they acted with the utmost candor and fair dealing for the interest of the corporation, and without taint
motives. We have subjected their conduct to this test, and, under the evidence, we believe it has safely
emerged from the ordeal.
Transaction which only accomplish justice, which are done in good faith and operate legal injury
to no one, lack the characteristics of fraud and are not to be upset because the relations of the
parties give rise to suspicions which are fully cleared away. (Hancock vs. Holbrook, supra.)
We therefore conclude that the sale or transfer made by the quorum of the board of directors a majority
of the stockholders is valid and binding upon the majority-the plaintiff. This conclusion is not in
violation of the articles of incorporation of the Philippine Engineering and Construction Company. Nor
do we here announce a doctrine contrary to that announced by the supreme court of Spain in its decisions
dated April 2, 1862, and July 8, 1903.
As to the third cause of action, it is insisted: First, that the court erred in holding the defendant
McCullough responsible for the personal effects of the plaintiff; and second, that the court erred in
finding that the effects left by the plaintiff were worth P2,400.
As we have said, the plaintiff was the manager of the Philippine Engineering Company from April 1,
1902, up to January 1, 1903. Sometimes during the previous month of December he resigned to accept a
position in China, but did not leave Manila until about January 20. He remained in Manila about twenty
days after he severed his connection with the company. He lived in rooms in the same building which was
rented by the company and were the company had its offices. When he started for China he left his
personal effects in those rooms, having turned the same over to one Paulsen. Testifying on this point the
plaintiff said:
Q. To whom did you turn over these personal effects on leaving here? A. To Mr. Paulsen.
Q. Have you demanded payment of this sum [referring to the value of his personal effects]? A.
On leaving for China I gave Mr. Haussermann power of attorney to represent me in this case and
demand payment.
Q. Please state whether or not you have an inventory of these effects. A. I had an inventory
which was in my possession but it was lost when the company took all of the books and carried
them away from the office.
Q. Can you give a list or a partial list of your effect? A. I remember some of the items. There
was a complete bedroom set, two marble tables, one glass bookcase, chairs, all of the household
effects I used when I was living in the Botanical Garden as city engineer, one theodolite, which I
bought after commencing work with the company.
Q. How much do you estimate to be the total reasonable value of these effects? A. The total
would not be less than $1,200 gold.
Counsel for the plaintiff, on page 56 of their brief, say:

Mr. McCullough, in his testimony (pp. 39 and 40) admits full knowledge of and participation in
the removal and sale of the effects and states that he took the proceeds and considered them part
of the assets of the company. He further admits that Mr. Haussermann made a demand for the
proceeds of Mr. Mead's personal effects (p. 44).
McCullough's testimony, referred by the counsel, is as follows:
Q. At the time Mr. Mead left for China, in the building where the office was and in the office,
there were left some of the personal effects of Mr. Mead. What do you know about these effects,
a list of which is Exhibit B? A. Nothing appearing in this Exhibit B was never delivered to the
Philippine Engineering and Construction Company, according to my list.
Q. Do you know what became of these effects? A. No, sir. I have no idea. I never saw them. I
never heard these effects talked about. I only heard something said about certain effects which
Mr. Mead had in his living room.
Q. Do you know what became of the bed of Mr. Mead? A. I know there were effects, such as a
bed, washstand, chairs, table, and other things, which are used in a living room, and that they
were in Mr. Mead's room. These effects were sent to the warehouse of the Pacific Oriental
Trading Company, together with the office furniture. We had to vacate the building where the
offices were and we had to take out everything therein. These things were deposited in the
warehouse of the Pacific Oriental Trading Company and were finally sold by that company and
the money turned over to me.
Q. How much? A. P49.97.
Q. What did you do with this money? A. I took it and considered it part of the assets of the
company. All of the other effects of the office were sold at the same time and brought P347.16.
Q. Did Mr. Mead leave anyone in charge of his effects when he left Manila? A. I think he left
Paulsen in charge, but Paulsen did not take these effects, so when we vacated the office we had to
move them.
Q. Did Paulsen continue occupying the living room where these effects were and did he use these
effects? A. I do not know because I was in the office for three months before we vacated.
Q. Don't you know that it is a fact that Mr. Haussermann, as representative of Mr. Mead,
demanded of you and the company the payment of the salary which was due Mr. Mead and the
value of his personal effects? A. Yes, sir.
As to the value of these personal effects, Hartigan, testifying as witness for the defendant, said:
I think the personal effects were sold for P50. His personal effects consisted of ordinary articles,
such as a person would use who had to be going from one place to another all the time, as Mr.
Mead. I know that all those effects were sold for less than P100, if I am not mistaken.
The foregoing is the material testimony with reference to the defendant McCullough's responsibility and
the value of the personal effects of the plaintiff.

McCullough was a member of the company and was responsible as such for the rents where the offices
were located. The company had no further use for the building after the plaintiff resigned. The vacating of
the building was the proper thing to do. The office furniture was removed and stored in a place where it
cost nothing for rents. When Hilbert, member of the company, went to the office to remove the company's
office furniture, he found no one in charge of the plaintiff's personal effects. He took them and stored
them in the same place and later sold them, together with the office furniture, and turned the entire
amount over to defendant McCullough.
Paulsen, in whose charge Mead left his effects, apparently took no interest in caring for them. Was the
company to leave Mead's personal effects in that building and take the chances of having to continue to
pay rents, solely on account of the plaintiff's property remaining there? The company had reason to
believe that it would have to continue paying these rents, as they had rented the building and authorized
the plaintiff to occupy rooms therein.
The plaintiff knew when he left for China that he would be away a long time. He had accepted a position
of importance, and which he knew would require his personal attention. He did not gather up his personal
effects, but left them in the room in charge of Paulsen. Paulsen took no interest in caring for them, but
apparently left these effects to take care of them selves. The plaintiff did not even carry with him an
inventory of these effects, but attempted on the trial to give a list of them and did give a partial list of the
things he left in his room; but it is not shown that all this things were there when Herbert removed the
office furniture and some of the plaintiff's effects. The fact that the plaintiff remained in Manila some
twenty days after resigning and never cared for his own effects but left them in the possession of an
irresponsible person, shows extreme negligence on his part. He exhibited a reckless indifference to the
consequences of leaving his effects in the lease premises. The law imposes on every person the duty of
using ordinary care against injury or damages. What constitutes ordinary care depends upon the
circumstances of each particular case and the danger reasonably to be apprehended.
McCullough did not have anything personally to do with these effects at any time. He only accepted the
money which Herbert turned over to him. He, personally, did not contribute in any way whatsoever to the
loss of the property, neither did he as a member of the corporation do so.
The plaintiff gave an estimate of the value of the effects which he left in his rooms and placed this value
at P2,400. He did not give a complete list of the effects so left, neither did he give the value of a single
item separately. The plaintiff's testimony is so indefinite and uncertain that i t is impossible to determine
with any degree of certainty just what these personal effects consisted of and their values, especially when
we take into consideration the significant fact that these effects were abondoned by Paulsen. On the other
hand, w have before us the positive testimony of Hilbert as to the amount received for the plaintiff's
personal effects, the testimony of Hartigan that the same were sold for less than P100, and the testimony
of McCullough as to the amount turned over to him by Herbert.
So we conclude that the great preponderance of evidence as to the value of these effects is in the favor of
the contention of the defendant. Their value therefore be fixed at P49.97.
For these reasons the judgment appealed from as to the first and second causes of action is hereby
affirmed. Judgment appealed from as to the third cause of action is reduced to P49.97, without costs.
G.R. No. L-2880 December 4, 1906

FRANK
S.
vs.
D. M. CARMAN, ET AL., defendants-appellants.

BOURNS, plaintiff-appellee,

W. A. Kincaid for appellants.

J. N. Wolfson for appellee.

MAPA, J.:
The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due on a
contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the contract relating to the said
work was entered into by the said Lo-Chim-Lim, acting as in his own name with the plaintiff, and it
appears that the said Lo-Chim-Lim personally agreed to pay for the work himself. The plaintiff, however,
has brought this action against Lo-Chim-Lim and his codefendants jointly, alleging that, at the time the
contract was made, they were the joint proprietors and operators of the said lumber yard engaged in the
purchase and sale of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to
show by the words above italicized that the other defendants were the partners of Lo-Chim-Lim in the
said lumber-yard business.lawphil.net
The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco on
the ground that they were not the partners of Lo-Chim-Lim, and rendered judgment against the other
defendants for the amount claimed in the complaint with the costs of proceedings. Vicente Palanca and
Go-Tauco only excepted to the said judgment, moved for a new trial, and have brought the case to this
court by bill of exceptions.
The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a certain
lumber yard in Calle Lemery of the city of Manila, and that he was the manager of the same, having
ordered the plaintiff to do some work for him at his sawmill in the city of Manila; and that Vicente
Palanca was his partner, and had an interest in the said business as well as in the profits and losses thereof
. . .," and that Go-Tuaco received part of the earnings of the lumber yard in the management of which he
was interested.
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber yard in
Calle Lemmery of the city of Manila in the year 1904, and participated in the profits and losses of
business and that Lo-Chim-Lim was managing partner of the said lumber yard." In other words,
coparticipants with the said Lo-Chim-Lim in the business in question.
Although the evidence upon this point as stated by the by the however, that is plainly and manifestly in
conflict with the above finding of that court. Such finding should therefore be sustained. lawphil.net
The question thus raised is, therefore, purely one of law and reduces itself to determining the real legal
nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard, and consequently
their liability toward the plaintiff, in connection with the transaction which gave rise to the present suit.

It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal
agreement only. At least there is no evidence tending to show that the said agreement was reduced to
writing, or that it was ever recorded in a public instrument.
Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that the
partnership was engaged in business under the name and style of Lo-Chim-Lim only, which according to
the evidence was the name of one of the defendants. On the other hand, and this is very important, it does
not appear that there was any mutual agreement, between the parties, and if there were any, it has not
been shown what the agreement was. As far as the evidence shows it seems that the business was
conducted by Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been
shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim individually in
his own name, and there is no evidence that the partnership over contracted in any other form. Under such
circumstances we find nothing upon which to consider this partnership other than as a partnership
of cuentas en participacion. It may be that, as a matter of fact, it is something different, but a simple
business and scant evidence introduced by the partnership We see nothing, according to the evidence, but
a simple business conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons
interested in the profits and losses of the business nowhere appearing. A partnership constituted in such a
manner, the existence of which was only known to those who had an interest in the same, being no mutual
agreements between the partners and without a corporate name indicating to the public in some way that
there were other people besides the one who ostensibly managed and conducted the business, is exactly
the accidental partnership of cuentas en participacion defined in article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas en
participacion is conducted, shall have only a right of action against such person and not against the other
persons interested, and the latter, on the other hand, shall have no right of action against the third person
who contracted with the manager unless such manager formally transfers his right to them. (Art 242 of the
code Of Commerce.) It follows, therefore that the plaintiff has no right to demand from the appellants the
payment of the amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with
him. the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly dismissed.
The judgment appealed from this hereby reversed and the appellants are absolved of the complaint
without express provisions as to the costs of both instances. After the expiration of twenty days let
judgment be entered in accordance herewith, and ten days thereafter the cause be remanded to the court
below for execution. So ordered.