1. G.R. No. L-23428 November 29, 1968

DETECTIVE & PROTECTIVE BUREAU, INC., petitioner, vs.THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as Presiding Judge of Branch VI, Court of First Instance of Manila, and FAUSTINO S. ALBERTO, respondents.

The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May 4, 1964, filed by Detective and Protective Bureau, Inc., therein plaintiff (petitioner herein) against Fausto S. Alberto, therein defendant (respondent herein), for accounting with preliminary injunction and receivership, alleged that plaintiff was a corporation duly organized and existing under the laws of the Philippines; that defendant was managing director of plaintiff corporation from 1952 until January 14, 1964; that in June, 1963, defendant illegally seized and took control of all the assets as well as the books, records, vouchers and receipts of the corporation from the accountant-cashier, concealed them illegally and refused to allow any member of the corporation to see and examine the same; that on January 14, 1964, the stockholders, in a meeting, removed defendant as managing director and elected Jose de la Rosa in his stead; that defendant not only had refused to vacate his office and to deliver the assets and books to Jose de la Rosa, but also continued to perform unauthorized acts for and in behalf of plaintiff corporation; that defendant had been required to submit a financial statement and to render an accounting of his administration from 1952 but defendant has failed to do so; that defendant, contrary to a resolution adopted by the Board of Directors on November 24, 1963, had been illegally disposing of corporate funds; that defendant, unless immediately restrained ex-parte, would continue discharging the functions of managing director; and that it was necessary to appoint a receiver to take charge of the assets and receive the income of the corporation. Plaintiff prayed that a preliminary injunction ex-parte be issued restraining defendant from exercising the functions of managing director and from disbursing and disposing of its funds; that Jose M. Barredo be appointed receiver; that, after judgment, the injunction be made permanent and defendant be ordered to render an accounting.

Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing plaintiff's prayer for ancillary relief and required the parties to submit their respective memoranda. On June 18, 1964, respondent Judge granted the writ of preliminary injunction prayed for, conditioned upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but while the same was pending approval defendant Fausto S. Alberto filed, on July 1, 1964, a motion to admit a counter-bond for the purpose of lifting the order granting the writ of preliminary injunction. Inspite of the opposition filed by plaintiff, respondent Judge issued, on August 5, 1964, an order admitting the counterbond and setting aside the writ of preliminary injunction.

On the belief that the order approving the counter-bond and lifting the writ of preliminary injunction was contrary to law and the act of respondent Judge constituted a grave abuse of discretion, and that there was no plain, speedy and adequate remedy available to it, plaintiff filed with this Court the instant petition for certiorari, praying that a writ of preliminary injunction enjoining defendant Fausto S. Albert from exercising the functions of managing director be issued, and that the order dated August 5, 1964 of respondent Judge approving the counter-bond and lifting the writ of preliminary injunction he had previously issued be set aside and declared null and void. The Court gave due course to the petition but did not issue a preliminary injunction.

In his answer, now respondent Fausto S. Alberto traversed the material allegations of the petition, justified the order complained of, and prayed for the dismissal of the petition.

From the pleadings, it appears that the only issue to be resolved is whether the order of respondent Judge dated August 5, 1964, admitting and approving the counter-bond of P5,000 and setting aside the writ of preliminary injunction granted in his order dated June 18, 164, was issued contrary to law and with grave abuse of discretion.

Now petitioner contends that the setting aside of the order granting the writ was contrary to law and was done with a grave abuse of discretion, because: (1) the motion to admit defendant's counter-bond was not supported by affidavits showing why the counter-bond should be admitted, as required by Section 6 of Rule 58; (2) the preliminary injunction was not issued ex-parte but after hearing, and the admission of the counter-bond rendered said writ ineffective; (3) the writ was granted in accordance with Rule 58 of the Rules of Court and established precedents' (4) public interest required that the writ be not set aside because respondent had arrogated unto himself all the powers of petitioning corporation, to the irreparable damage of the corporation; and that (5) the counter-bond could not compensate petitioner's damage.

1. The first reason given by petitioner in support of its contention that the dissolution of the writ of preliminary injunction was contrary to law is that the motion to admit respondent's counter-bond for the dissolution of the writ was not supported by affidavits as required by section 6 of Rule 58 of the Rules of Court. The controverted motion, however, does not appear in the record. However, the record shows that respondent Alberto had filed a verified answer to the complaint and a verified opposition to the issuance of the writ of preliminary injunction.

Regarding the necessity of verification of the motion for dissolution of a writ of preliminary injunction, this Court has ruled that the requirement of verification is not absolute but is dependent on the circumstances obtaining in a particular case. In the case of Sy Sam Bio, et al. vs. Barrios and Buyson Lampa,1 the only question raised was whether the respondent Judge exceeded his jurisdiction and abused his discretion in setting aside an order directing the issuance of a writ of preliminary injunction. In maintaining the affirmative, petitioners in that case alleged that the questioned order was issued in violation of the provisions of Section 169 of Act 190(which is one of the sources of Sec. 6 of Rule 58 of the revised Rules of Court)inasmuch as the Judge set aside said order and directed the dissolution of the preliminary injunction without any formal petition of the parties and without having followed the procedure prescribed by the statute. There was, however, a verbal application for the dissolution of the writ, based upon the ground of the in suficiency of the complaint which was the basis of the application for the issuance of said writ of preliminary injunction. This Court said:

Section 169 of Act 1909 does not prescribe the manner of filing the application to annul or modify a writ of preliminary injunction. It simply states that if a temporary injunction be granted without notice, the defendant, at any time before trial, may apply, upon reasonable notice to the adverse party, to the judge who granted the injunction, or to the judge of the court of which the action was brought, to dissolve or modify the same.

On the strength of the decision in the above-cited case, this Court in Caluya, et al. vs. Ramos, et al.,2 said;

Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No. 4634 was not verified, is also groundless inasmuch as even an indirect verbal application for the dissolution of an ex parteorder of preliminary injunction has been held to be a sufficient compliance with the provisions of Section 6 of Rule 60 (Moran, Comments on the Rules of Court,

Second Edition, Vol. II, p. 65, citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious reason being that said rule does not prescribe the form by which an application for the dissolution or modification of an order of preliminary injunction should be presented.

If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58) of the Rules of Court did not require any form for the application for the dissolution of the writ of preliminary injunction, then respondent Fausto Alberto's motion to lift the preliminary injunction in the court below need not be verified, and much less must the motion be supported by affidavits, as urged by petitioner.

However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for the dissolution of a writ of preliminary injunction should be verified. In that case, respondent Tayag filed an unverified motion for the dissolution of a writ of preliminary injunction, alleging that the same "would work great damage to the defendant who had already spend a considerable sum of money" and that petitioners "can be fully compensated for any damages that they may suffer." The court granted the motion and dissolved the preliminary injunction. In an original action for a writ of certiorari filed with this Court to annual said order, this Court remarked in part:

Petitioners herein are entitled to the writ prayed for. The motion of respondent Tayag for the dissolution of the writ of preliminary injunction issued on October 22, 1959, was unverified....

From the precedents quoted above, as well as from the terminology of Section 6 of Rule 58 of the new Rules of Court, it is evident that whether the application for the dissolution of the writ of preliminary injunction must be verified or not depends upon the ground upon which such application is based. If the application is based on the insufficiency of the complaint, the motion need not be verified. If the motion is based on the ground that the injunction would cause great damage to defendant while the plaintiff can be fully compensated for such damages as he may suffer, the motion should be verified.

In the instant case, it is alleged by petitioner that the motion for the dissolution of the writ of preliminary injunction was not verified. This allegation was not denied in the answer. But because said motion does not appear in the record of the case now before this Court, We cannot determine what are the grounds for the dissolution that are alleged therein, and so We cannot rule on whether the motion should have been verified or not. This Court, therefore, has to rely on the order of respondent Judge, dated August 5, 1964, which states that "the filing of the counter-bond is in accordance with law." Consequently, the first ground alleged by petitioner must be brushed aside.

2. The second and third reasons alleged by petitioner in its petition for certiorari assume that a preliminary injunction issued after hearing and in accordance with Rule 58 cannot be set aside. This contention is untenable. The provision of Section 6 of Rule 58 that "the injunction may be refused, or, if granted ex parte, may be dissolved" can not be construed as putting beyond the reach of the court the dissolution of an injunction which was granted after hearing. The reason is because a writ of preliminary injunction is an interlocutory order, and as such it is always under the control of the court before final judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4 this Court said:

The first contention of the petitioners is that, as said injunction was issued after a hearing, the same cannot be dissolved, specially on the strength of an unverified motion for dissolution and in the absence to support it. Reliance is placed on Section 6

of Rule 60 of the Rules of Court which provides that "the injunction may be reduced, or, if granted ex parte, maybe dissolved," thereby arguing that if an injunction is not issued ex parte the same cannot be dissolved. The contention is clearly erroneous. Although said section prescribes the grounds for objecting to, or for moving the dissolution of, a preliminary injunction prior to its issuance or after its granting ex parte, it does not thereby outlaw a dissolution if the injunction has been issued after a hearing. This is to be so, because a writ of preliminary injunction is an interlocutory order which is always under the control of the court before final judgment. (Manila Electric Company vs. Artiaga and Green, 50 Phil. 144, 147).

This Court has also ruled that the dissolution of a writ of preliminary injunction issued after hearing, even if the dissolution is ordered without giving the other party an opportunity to be heard, does not constitute an abuse of discretion and may be cured not by certiorari but by appeal. In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et al.,5 one of the issues presented was whether a writ of preliminary injunction granted the plaintiff by a trial court after hearing, might be dissolved upon an ex parte application by the defendant, and this Court ruled that:

The action of a trial court in dissolving a writ of preliminary injunction already issued after hearing, without giving petitioner an opportunity to be heard, does not constitute lack or excess of jurisdiction or an abuse of discretion, and any irregularity committed by the trial court on this score may be cured not by certiorari but by appeal.

3. The fourth reason alleged by petitioner in support of its stand is that public interest demanded that the writ enjoining respondent Fausto Alberto from exercising the functions of managing director be maintained. Petitioner contended that respondent Alberto had arrogated to himself the power of the Board of Directors of the corporation because he refused to vacate the office and surrender the same to Jose de la Rosa who had been elected managing director by the Board to succeed him. This assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation.

There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part provides:

There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part provides:

Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporations....

If he could not be a director, he could also not be a managing director of the corporation, pursuant to Article V, Section 3 of the By-Laws of the Corporation which provides that:

The manager shall be elected by the Board of Directors from among its members.... (Record, p. 48)

If the managing director-elect was not qualified to become managing director, respondent Fausto Alberto could not be compelled to vacate his office and cede the same to the managing director-elect because the by-laws of the corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly qualified successor."

4. The fifth reason alleged by herein petitioner in support of its contention that respondent Judge gravely abused his discretion when he lifted the preliminary injunction upon the filing of the counter-bond was that said counter-bond could not compensate for the irreparable damage that the corporation would suffer by reason of the continuance of respondent Fausto Alberto as managing director of the corporation. Respondent Alberto, on the contrary, contended that he really was the owner of the controlling interest in the business carried on the name of the petitioner, having invested therein a total of P57,727.29 as against the sum of P4,000 only invested by one other director, Jose M. Barredo. We find that there was a question as to who own the controlling interest in the corporation. Where ownership is in dispute, the party in control or possession of the disputed interest is presumed to have the better right until the contrary is adjudged, and hence that party should not be deprived of the control or possession until the court is prepared to adjudicate the controverted right in favor of the other party.6

Should it be the truth that respondent Alberto is the controlling stockholder, then the damages said respondent would suffer would be the same, if not more, as the damages that the corporation would suffer if the injunction were maintained. If the bond of P5,000 filed by petitioner for the injunction would be sufficient to answer for the damages that would be suffered by respondent Alberto by reason of the injunction, there seems to be no reason why the same amount would not be sufficient to answer for the damages that might be suffered by the petitioning corporation by reason of the lifting of the injunction. The following ruling of this Court has a persuasive application in this case:

The rule that a court should not, by means of a preliminary injunction, transfer property in litigation from the possession of one party to another is more particularly applicable where the legal title is in dispute and the party having possession asserts ownership in himself.7

Let it be stated, in relation to all the reason given by petitioner, that it is a settled rule that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case — the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law,8 and it is equally well settled that a wide latitude is given under Section 7 of Rule 58 of the Rules of Court to the trial court to modify or dissolve the injunction as justice may require. The court which is to exercise that discretion is the trial court, not the appellate court.9 The exercise of sound judicial discretion by the lower court in injunctive matters should not be interfered with except in cases of manifest abuse.10 In the instant case, We find that petitioner failed to show manifest abuse of discretion by respondent Judge in setting aside the writ of preliminary injunction.

There is, however, one vital reason why the instant petition for certiorari should be denied. And it is, that from the order dissolving the writ of preliminary injunction, the petitioner has gone directly to this Court without giving the respondent Judge (or trial court) a chance or opportunity to correct his error, if any, in an appropriate motion for reconsideration. An omission to comply with this procedural requirement justifies a denial of the writ applied for.11

The instant case is not one of the exceptions in the application of this rule, which are: where the questions of jurisdiction has been squarely raised, argued before, submitted to, and met and decided by the respondent court; where the questioned order is a patent nullity; and where there is a deprivation of the petitioner's fundamental right to due process.12

It being our considered view that respondent Judge had not committed grave abuse of discretion in issuing the order dated August 5, 1964 lifting the writ of preliminary injunction which had previously been granted in the order dated June 18, 1964, and the herein petition for certiorari having been filed without previously complying with a well settled procedural requirement, there is no alternative for this Court but to order its dismissal.

WHEREFORE, the instant petition for certiorari with preliminary injunction is dismissed, with costs againsts the petitioner. It is so ordered.

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

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

Assailed in this petition for review is the decision of the respondent Court of Appeals in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December 1979, reversing the decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte dated 20 November 1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus Prime White Cement Corporation."

The root of this controversy is the undated letter-offer of Constancio B. Maglana, President and Chairman of the Board of private respondent Prime White Cement Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which describes itself as "a business concern of single proprietorship," 3 and is represented by its manager, Mr. Henry Yao; the letter reads as follows:

PRIME WHITE CEMENT CORPORATION602 Cardinal Life BuildingHerran Street, Manila

Yao Ka SinTacloban City

Gentlemen:

We have the pleasure to submit hereby our firm offer to you under the following quotations, terms, and conditions, to wit:

1). Commodity — Prime White Cement

2). Price — At your option: a) P24.30 per 94 lbs. bag net, FOB Cebu City; and b) P23.30 per 94 lbs. bag net, FOB Asturias Cebu.

3). Quality — As fully specified in certificate No. 224-73 by Bureau of Public Works, Republic of the Philippines.

4). Quantity — Forty-five Thousand (45,000) bags at 94 lbs. net per bag withdrawable in guaranteed monthly quantity of Fifteen Thousand (15,000) bags minimum effective from June, 1973 to August 1973.

5). Delivery Schedule — Shipment be made within four (4) days upon receipt of your shipping instruction.

6). Bag/Container — a) All be made of Standard Kraft (water resistant paper, 4 ply, with bursting strength of 220 pounds, and b) Breakage allowance — additional four percent (4%) over the quantity of each shipment.

7). Terms of Payment — Down payment of PESOS: TWO HUNDRED FORTY THREE THOUSAND (P243,000.00) payable on the signing of this contract and the balance to be paid upon presentation of corresponding shipping documents.

It is understood that in the event of a delay in our shipment, you hold the option to discount any price differential resulting from a lower market price vis-a-vis the contract price. In addition, grant (sic) you the option to extend this contract until the complete delivery of Forty Five Thousand (45,000) bags of 94 lbs. each is made by us. You are also hereby granted the option to renew this contract under the same price, terms and conditions.

Please countersign on the space provided for below as your acknowledgement and confirmation of the above transaction. Thank You.

V truly yours,

PRIME WHITE CEMENT CORPORATIONBY: (SGD) CONSTANCIO B. MAGLANA

President & Chairman

CONFORME:

YAO KA SIN TRADINGBY: (SGD) HENRY YAO

WITNESSES:

(SGD) T. CATINDIG (SGD) ERNESTO LIM

RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above offer, the sum of Pesos: TWO HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in the form of Producers' Bank of the Philippines Check No. C-153576 dated June 7, 1973.

PRIME WHITE CEMENT CORPORATIONBY:

(SGD) CONSTANCIO B. MAGLANAPresident & Chairman 4

This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and signed on 7 June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President of the Consolidated Bank and Trust Corporation (Solid Bank). 5

The principal issue raised in this case is whether or not the aforesaid letter-offer, as accepted by YKS, is a contract that binds the PWCC. The trial court rule in favor of the petitioner, but the respondent Court held otherwise.

The records disclose the following material operative facts:

In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the signing of Exhibit "A", the Board of Directors of PWCC disapproved the same; the rejection is evidenced by the following Minutes (Exhibit "10"):

the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of the alledged letter-contract adhered to by them, but must be understood as a new and separate contract, and has in no way to do with the letter-offer which they (sic) as consummated is by this resolution totally disapproved and is unacceptable to the corporation.

On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the disapproval of Exhibit "A". Pursuant, however, to its decision with respect to the 10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit "5") for the payment of the same in the amount of P243,000.00 This is the same amount received and acknowledged by Maglana in Exhibit "A".

YKS accepted without protest both the Delivery and Official Receipts.

While YKS denied having received a copy of Exhibit "1", it was established that the original thereof was shown to Mr. Henry Yao; since no one would sign a receipt for it, the original was left at the latter's office and this fact was duly noted in Exhibit "1" (Exhibit "l-A").

On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's 4 August 1973 letter stating that it is "withdrawing or taking delivery of not less than 10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that PWCC "only committed to you and which you correspondingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 11, 1973. 6 Unfortunately, no copy of the said 4 August 1973 letter of YKS was presented in evidence.

On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the latter's letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit "2". While the records reveal that YKS received this reply also on 21 August 1973 (Exhibit "3" "A"), 8 it still denied having received it. Likewise, no copy of the so-called 15 August 1973 letter was presented in evidence.

On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a follow-up to the letter of 15 August 1973; YKS insisted on the delivery of 45,030 bags of white cement. 10

On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the latter's attention to the statement of delivery dated 24 August 1973, particularly the price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11

On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on the full compliance with the terms of Exhibit "A" and informing the latter that it is exercising the option therein stipulated.

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the 2 November 1973 telegram, but this was returned to sender as unclaimed. 13

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

On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last time, compliance by the latter with its obligation underExhibit "A". 14

On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit "A". 15

On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint for Specific Performance with Damages against PWCC. The complaint 16 was based on Exhibit "A" and was docketed as Civil Case No. 5064.

In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath the material averments in the complaint and alleged that: (a) YKS "has no legal personality to sue having no legal personality even by fiction to represent itself;" (b) Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c) such signing was subject to the condition that Exhibit "A" be approved by the Board of Directors of PWCC, as corporate commitments are made through it; (d) the latter disapproved it, hence Exhibit "A" was never consummated and is not enforceable against PWCC; (e) it agreed to sell 10,000 bags of white cement, not under Exhibit "A", but under a separate contract prepared by the Board; (f) the rejection by the Board of Exhibit "A" was made known to YKS through various letters sent to it, copies of which were attached to the Answer as Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC, that only 10;000 bags were sold to it without any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h) YKS is solely to blame for the failure to take complete delivery of 10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has, therefore, no cause of action.

In its Counterclaim, PWCC asks for moral damages in the amount of not less than P10,000.00, exemplary damages in the sum of P500,000.00 and attorney's fees in the sum of P10,000.00.

On 24 July 1974, YKS filed its Answer to the Counterclaim. 21

Issues having been joined, the trial court conducted a pre-trial. 22 On that occasion, the parties admitted that according to the By-Laws of PWCC, the Chairman of the Board, who is also the President of the corporation, "has the power to execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation enters into," subject to the qualification that "all the president's actuations, prior to and after he had signed and executed said contracts, shall be given to the board of directors of defendant Corporation." Furthermore, it was likewise stated for the record "that the corporation is a semi-subsidiary of the government because of the NIDC participation in the same, and that all contracts of the corporation should meet the approval of the NIDC and/or the PNB Board because of an exposure and financial involvement of around P10 million therein. 23

During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding upon it because Mr. Maglana was not authorized to make the offer and sign the contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of Directors has the power . . . (7) To enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation and the existing provisions of law. 24 Among the powers of the President is "to operate and conduct the business of the corporation according to his own judgment and discretion, whenever the same is not expressly limited by such orders, directives or resolutions." 25 Per standard practice of the corporation, contracts should first pass through the marketing and intelligence unit

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

On 20 November 1975, after trial on the merits, the court handed down its decision in favor of herein petitioner, the dispositive portion of which reads:

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

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

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

SO ORDERED. 27

In disregarding PWCC's theory, the trial court interpreted the provision of the By-Laws — granting its Board of Directors the power to enter into an agreement or contract of any kind with any person through the President, — to mean that the latter may enter into such contract or agreement at any time and that the same is not subject to the ratification of the board of directors but "subject only to the declared objects and purpose of the corporation and existing laws." It then concluded:

It is obvious therefore, that it is not the whole membership of the board of directors who actually enters into any contract with any person in the name and for and in behalf of the corporation, but only its president. It is likewise crystal clear that this automatic representation of the board by the president is limited only by the "declared objects and purpose of the corporation and existing provisions of law." 28

It likewise interpreted the provision on the power of the president to "operate and conduct the business of the corporation according to the orders, directives or resolutions of the board of directors and according to his own judgment and discretion whenever the same is not expressly limited by such orders, directives and resolutions," to mean that the president can operate and conduct the business of the corporation according to his own judgment and discretion as long as it is not expressly limited by the orders, directives or resolutions of the board of directors. 29 The trial court found no evidence that the board had set a prior limitation upon the exercise of such judgment and discretion; it further ruled that the By-Laws, does not require that Exhibit "A" be approved by the Board of Directors. Finally, in the light of the Chairman's power to "execute and sign for and in behalf of the corporation all contracts or agreements which the corporation may enter into" (Exhibit "I-1"), it concluded that Mr. Maglana merely followed the By-Laws "presumably both as president and chairman of the board thereof." 30 Hence, Exhibit "A" was validly entered into by Maglana and thus binds the corporation.

The trial court, however, ruled that the option to sell is not valid because it is not supported by any consideration distinct from the price; it was exercised before compliance with the original contract by PWCC; and the

repudiation of the original contract by PWCC was deemed a withdrawal of the option before acceptance by the petitioner.

Both parties appealed from the said decision to the respondent Court of Appeals before which petitioner presented the following Assignment of Errors:

I

THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN BEFORE THE COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM THE PRICE.

II

THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES, SUFFICIENT EXEMPLARY DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT AND PROVEN DURING THE TRIAL." 31

while the private respondent cited the following errors:

I

THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR LATER ON RATIFIED BY THE DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN LANGUAGE AND DULY INFORMED AND TRANSMITTED TO PLAINTIFF.

II

THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-EXISTING CONTRACT.

III

THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT HIS VERY OWN ACTUATIONS AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS OF CEMENT ONLY, UNDER THE PRICE, TERMS AND CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT FROM THOSE WHICH APPEAR IN EXHIBIT "A".

IV

THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY CLEAR AND INDUBITABLE EVIDENCE. 32

In its decision 33 promulgated on 21 December 1979, the respondent Court reversed the decision of the trial court, thus:

WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiff's complaint is dismissed with costs. Plaintiff is ordered to pay defendant corporation P25,000.00 exemplary damages, and P10,000.00 attorney's fees.

SO ORDERED.

Such conclusion is based on its findings, to wit:

Before resolving the issue, it is helpful to bring out some preliminary facts. First, the defendant corporation is supervised and principally financed by the National Investment and Development Corporation (NIDC), a subsidiary investment of the Philippine National Bank (PNB), with cash financial exposure of some P10,000,000.00. PNB is a government financial institution whose Board is chairmaned (sic) by the Minister of National Defense. This fact is very material to the issue of whether defendant corporations president can bind the corporation with his own act.

Second, for failure to deny under oath the following actionable documents in support of defendant's counterclaim:

1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973, on the 10,000 bags of white cement delivered to plaintiff was not by reason of the letter contract, Exhibit "A", which was totally disapproved by defendant corporation's board of directors, clearly stating that "If within ten (10) days from date hereof, we will not hear from you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the Board." (Annex "I" to defendant's Answer).

2. Letter of defendant to plaintiff dated August 4, 1973 that defendant "only committed to you and which you accordingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 1, 1973" (Annex "2" of defendant's Answer).

3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of August 4, 1973 (Annex "3" to defendant's Answer).

4. Letter to stores dated August 21, 1973,

5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement at P24.30 per bag (Annex "5", to defendant's Answer).

plaintiff is deemed to have admitted, not only the due execution and genuiness (sic) of said documents, (Rule 8 Sec. 8, Rules of Court) but also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing documents tend to prove that the letter-offer, Exhibit "A", was rejected by defendant corporation's Board of

Directors and plaintiff was duly notified thereof and that the P243,000.00 check was considered by both parties as payment of the 10,000 bags of cement under a separate transaction. As proof of which plaintiff did not complain nor protest until February 9, 1974, when he threatened legal action.

Third, Maglana's signing the letter-offer prepared for him in the Solidbank was made clearly upon the condition that it was subject to the approval of the board of directors of defendant corporation. We find consistency herein because according to the Corporation Law, and the By-Laws of defendant corporation, all corporate commitments and business are conducted by, and contracts entered into through, the express authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I" or "8").

Fourth, What Henry Yao and Maglana agreed upon as embodied in Exhibit "A", insofar as defendant corporation is concerned, was an unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And because Maglana was not authorized by the Board of Directors of defendant corporation nor was his, actuation ratified by the Board, the agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O-G. 3224).

While it may be true that Maglana is President of defendant corporation nowhere in the Articles of Incorporation nor in the By-Laws of said corporation was he empowered to enter into any contract all by himself and bind the corporation without first securing the authority and consent of the Board of Directors. Whatever authority Maglana may have must be derived from the Board of Directors of defendant corporation. A corporate officers power as an agent must be sought from the law, the articles of incorporation and the By-Laws or from a resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of Liquidators vs. Kalaw, 20 SCRA 987).

It clearly results from the foregoing that the judgment appealed from is untenable. Having no cause of action against defendant corporation, plaintiff is not entitled to any relief. We see no justification, therefore, for the court a quo'sawards in its favor. . . . 34

Its motion for reconsideration having been denied by the respondent Court in its resolution 35 dated 15 April 1980, petitioner filed the instant petition based on the following grounds:

1. That the contract (Exh. "A") entered into by the President and Chairman of the Board of Directors Constancio B. Maglana in behalf of the respondent corporation binds the said corporation.

2. That the contract (Exh. "A") was never novated nor superceded (sic) by a subsequent contract.

3. That the option to renew the contract as contained in Exhibit "A" is enforceable.

4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party appear (sic) to be a party to the instrument but not to one who is not a party to the instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to denying under oath refers only to allegations ofusury. 36

We gave due course 37 to the petition after private respondent filed its Comment 38 and required the parties to submit simultaneously their Memoranda, which the parties subsequently complied with. 39

Before going any further, this Court must first resolve an issue which, although raised in the Answer of private respondent, was neither pursued in its appeal before the respondent Court nor in its Comment and Memorandum in this case. It also eluded the attention of the trial court and the respondent Court. The issue, which is of paramount importance, concerns the lack of capacity of plaintiff/petitioner to sue. In the caption of both the complaint and the instant petition, the plaintiff and the petitioner, respectively, is:

YAO KA SIN TRADING,owned and operated byYAO KA SIN. 40

and is described in the body thereof as "a business concern of single proprietorship owned and operated by Yao Ka Sin." 41 In the body of the petition, it is described as "a single proprietorship business concern." 42 It also appears that, as gathered from the decision of the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took the witness stand and testified that he is the "manager of Yao Ka Sin Trading" and "it was in representation of the plaintiff" that he signed Exhibit "A" 43 Under Section 1, Rule 3 of the Rules of Court, only natural or juridical persons or entities authorized by law may be parties in a civil action. In Juasing Hardware vs. Mendoza, 44 this Court held that a single proprietorship is neither a natural person nor a juridical person under Article 44 of the Civil Code; it is not an entity authorized by law to bring suit in court:

The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a single individual, and requires the proprietor or owner thereof to secure licenses and permits, register the business name, and pair taxes to the national government. It does not vest juridical or legal personality upon the sole proprietorship nor empower it to file or defend an action in court. 45

Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46

The complaint then should have been amended to implead Yao Ka Sin as plaintiff in substitution of Yao Ka Sin Trading. However, it is now too late in the history of this case to dismiss this petition and, in effect, nullify all proceedings had before the trial court and the respondent Court on the sole ground of petitioner's lack of capacity to sue. Considering that private respondent did not pursue this issue before the respondent Court and this Court; that, as We held in Juasing, the defect is merely formal and not substantial, and an amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the Rules of Court which provides that "[a] defect in the designation of the parties may be summarily corrected at any stage of the action provided no prejudice is caused thereby to the adverse party;" and that "[a] sole proprietorship does not, of coarse, possess any juridical personality separate and apart from the personality of the owner of the enterprise and the personality of the persons acting in the name of such

proprietorship," 47 We hold and declare that Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the instant case. As this Court stated nearly eighty (80) years ago in Alonso vs. Villamor: 48

No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error send this case back for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same defense, the same interests, the same witnesses, and the same evidence. The name of the plaintiff would constitute the only difference between the old trial and the new. In our judgment there is not enough in a name to justify such action.

And now to the merits of the petition.

The respondent Court correctly ruled that Exhibit "A" is not binding upon the private respondent. Mr. Maglana, its President and Chairman, was not empowered to execute it. Petitioner, on the other hand, maintains that it is a valid contract because the Maglana has the power to enter into contracts for the corporation as implied from the following provisions of the By-Laws of private respondent:

a) The power of the Board of Directors to . . . enter into (sic) agreement or contract of any kind with any person in the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation and the existing provisions of law. (Exhibit "8-A"); and

b) The power of the Chairman of the Board of Directors to "execute and sign, for and in behalf of the corporation, all contracts or agreements which the corporation may enter into" (Exhibit "I-1").

And even admitting, for the sake of argument, that Mr. Maglana was not so authorized under the By-Laws, the private respondent, pursuant to the doctrine laid down by this Court in Francisco vs. Government Service InsuranceSystem 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for clothing him with apparent authority.

We are not persuaded.

Since a corporation, such as the private respondent, can act only through its officers and agents, "all acts within the powers of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents when once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons." 51 Moreover, " . . . a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. 52

While there can be no question that Mr. Maglana was an officer — the President and Chairman — of private respondent corporation at the time he signed Exhibit "A", the above provisions of said private respondent's By-Laws do not in any way confer upon the President the authority to enter into contracts for the corporation independently, of the Board of Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the contract, only the President — and not all the members of the Board, or so much thereof as are required for the act — shall sign it for the corporation. This is the import of the words through the president in Exhibit "8-A" and the clear intent of the power of the chairman "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into" in Exhibit "I-1". Both powers presuppose a prior act of the corporation exercised through the Board of Directors. No greater power can be implied from such express, but limited, delegated authority. Neither can it be logically claimed that any power greater than that expressly conferred is inherent in Mr. Maglana's position as president and chairman of the corporation.

Although there is authority "that if the president is given general control and supervision over the affairs of the corporation, it will be presumed that he has authority to make contract and do acts within the course of its ordinary business," 53 We find such inapplicable in this case. We note that the private corporation has a general manager who, under its By-Laws has, inter alia, the following powers: "(a) to have the active and direct management of the business and operation of the corporation, conducting the same accordingly to the order, directives or resolutions of the Board of Directors or of the president." It goes without saying then that Mr. Maglana did not have a direct and active and in the management of the business and operations of the corporation. Besides, no evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts similar to that of Exhibit "A" either with the petitioner or with other parties.

Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. Maglana with the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such power. The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time." 54 Also, "if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be estopped to deny that such apparent authority in real, as to innocent third persons dealing in good faith with such officers or agents." 55 This "apparent authority may result from (1) the general manner, by which the corporation holds out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general or (2) acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the scope of his ordinary powers. 56

It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any similar contract. This could have been easily done by evidence of similar acts executed either in its favor or in favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private respondent's evidence overwhelmingly shows that no contract can be signed by the president without first being approved by the Board of Directors; such approval may only be given after the contract passes through, at least, the comptroller, who is the NIDC representative, and the legal counsel.

The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said cases, this Court found sufficient evidence, based on the conduct and actuations of the corporations concerned, of apparent authority conferred upon the officer involved which bound the corporations on the basis of ratification. In the first case, it was established that the offer of compromise made by plaintiff in the letter, Exhibit "A", was validly accepted by the GSIS. The terms of the trial offer were clear, and over the signature of defendant's general manager Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. It was sent by the GSIS Board Secretary and defendant did not disown the same. Moreover, in a letter remitting the payment of P30,000 advanced by her father, plaintiff quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram. This Court then ruled that:

This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393).

Art. 1393. Ratification may be effected expressly or tactly it is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right

In the second case, this Court found:

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the by-laws requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under Article 1317 of the Civil Code which provides as follows:

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it, has been execrated, before it is revoked by the other contracting party.

The second ground is based on a wrong premise. It assumes, contrary to Our conclusion above, that Exhibit "A" is a valid contract binding upon the private respondent. It was effectively disapproved and rejected by the Board of Directors which, at the same time, considered the amount of P243,000.00 received Mr. Maglana as payment for 10,000 bags of white cement, treated as an entirely different contract, and forthwith notified petitioner of its decision that "If within ten (10) days from date hereof we will not hear from you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June

7, 1973 issued by the Producers Bank of the Philippines, per instruction of the Board." 57Petitioner received the copy of this notification and thereafter accepted without any protest the Delivery Receipt covering the 10,000 bags and the Official Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had in fact agreed to a new transaction involving only 10,000 bags of white cement.

The third ground must likewise fail. Exhibit "A" being unenforceable, the option to renew it would have no leg to stand on. The river cannot rise higher than its source. In any event, the option granted in. this case is without any consideration Article 1324 of the Civil Code expressly provides that:

When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.

while Article 1749 of the same Code provides:

A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

Accordingly, even if it were accepted, it can not validly bind the private respondent. 58

The fourth ground is, however, meritorious.

Section 8, Rule 8 of the Rules of Court provides:

Sec. 8. How to contest genuineness of such documents — When an action or defense is founded upon a written instrument, copied in or attached in the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not appear, to be a party to the instrument or when compliance with an order for an inspection of the original instrument is refused.

It is clear that the petitioner is not a party to any of the documents attached to the private respondent's Answer. Thus, the above quoted rule is not applicable. 59 While the respondent Court, erred in holding otherwise, the challenged decision must, nevertheless, stand in view of the above disquisitions on the first to the third grounds of the petition.

WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21 December 1979.

Cost against the petitioner.

3. G.R. No. 76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners, vs.FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS COMMISSION, respondents.

The controversy at bench arose from a complaint filed by private respondents, 1 namely, Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto Bautista, Edward Mamaril, Marissa Pascual and Allan Pimentel, against their employer Lopez Realty Incorporated (petitioner) and its majority stockholder, Asuncion Lopez Gonzales, for alleged non-payment of their gratuity pay and other benefits. 2 The case was docketed as NLRC-NCR Case No. 2-2176-82.

Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion Lopez Gonzales is one of its majority shareholders. Her interest in the company vis-a-vis the other shareholders is as follows:

1 Asuncion Lopez Gonzales 7831 shares

2 Teresita Lopez Marquez 7830 shares

3 Arturo F. Lopez 7830 shares

4 Rosendo de Leon 4 shares

5 Benjamin Bernardino 1 share

6 Leo Rivera 1 share

Except for Arturo F. Lopez, the rest of the shareholders also sit as members of the Board of Directors.

As found by the Labor arbiter. 3 sometime in 1978, Arturo Lopez submitted a proposal relative to the distribution of certain assets of petitioner corporation among its three (3) main shareholders. The proposal had three (3) aspects,viz: (1) the sale of assets of the company to pay for its obligations; (2) the transfer of certain assets of the company to its three (3) main shareholders, while some other assets shall remain with the company; and (3) the reduction of employees with provision for their gratuity pay. The proposal was deliberated upon and approved in a special meeting of the board of directors held on April 17, 1978.

It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay of its employees, viz: (a) Resolution No. 6, Series of 1980, passed by the stockholders in a special meeting held on September 8, 1980, resolving to set aside, twice a year, a certain sum of money for the gratuity pay of itsretiring employees and to create a Gratuity Fund for the said contingency; and (b) Resolution No. 10,Series of 1980, setting aside the amount of P157,750.00 as Gratuity Fund covering the period from 1950 up to 1980.

Meanwhile, on July 28, 1981, board member and majority stockholder Teresita Lopez Marquez died.

On August 17, 1981, except for Asuncion Lopez Gonzales who was then abroad, the remaining members of the Board of Directors, namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a special meeting and passed a resolution which reads:

Resolved, as it is hereby resolved that the gratuity (pay) of the employees be given as follows:

(a) Those who will be laid off be given the full amount of gratuity;

(b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1, 1981, and another 25% on January 1, 1982, and 50% to be retained by the office in the meantime. (emphasis supplied)

Private respondents were the retained employees of petitioner corporation. In a letter, dated August 31, 1981, private respondents requested for the full payment of their gratuity pay. Their request was granted in a special meeting held on September 1, 1981. The relevant, portion of the minutes of the said board meeting reads:

In view of the request of the employees contained in the letter dated August 31, 1981, it was also decided that, all those remaining employees will receive another 25% (of their gratuity) on or before October 15, 1981 and another 25% on or before the end of November, 1981 of their respective gratuity.

At that, time, however, petitioner Asuncion Lopez Gonzales was still abroad. Allegedly, while she was still out of the country, she sent a cablegram to the corporation, objecting to certain matters taken up by the board in her absence, such as the sale of some of the assets of the corporation. Upon her return, she flied a derivative suit with the Securities and Exchange Commission (SEC) against majority shareholder Arturo F. Lopez.

Notwithstanding the "corporate squabble" between petitioner Asuncion Lopez Gonzales and Arturo Lopez, the first two (2) installments of the gratuity pay of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were paid by petitioner corporation.

Also, petitioner corporation had prepared the cash vouchers and checks for the third installments of gratuity pay of said private respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista). For some reason, said vouchers were cancelled by petitioner Asuncion Lopez Gonzales.

Likewise, the first, second and third installments of gratuity pay of the rest of private respondents, particularly, Edward Mamaril, Marissa Pascual and Allan Pimentel, were prepared but cancelled by petitioner Asuncion Lopez Gonzales. Despite private respondents' repeated demands for their gratuity pay, corporation refused to pay the same. 4

On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor of private respondents. 5

Petitioners appealed the adverse ruling of the Labor arbiter to public respondent National Labor Relations Commission. The appeal focused on the alleged non-ratification and non-approval of the assailed August 17, 1981 and September 1, 1981 Board Resolutions during the Annual Stockholders' Meeting held on March 1, 1982. Petitioners further insisted that the payment of the gratuity to some of the private respondents was a mere "mistake" on the part of petitioner corporation since, pursuant to Resolution No. 6, dated September 8, 1980, and Resolution No. 10, dated October 6, 1980, said gratuity pay should be given only upon the employees' retirement.

On November 20, 1985, public respondent, through its Second Division, dismissed the appeal for lack of merit, the pertinent portion of which states: 6

We cannot agree with the contention of respondents (petitioners') that the Labor Arbiter a quo committed abuse of discretion in his decision.

Respondents' (petitioners') contention that, the two (2) resolutions dated 17 August 1981 and 1 September 1981 . . . which were not approved in the annual stockholders meeting had no force and effect, deserves scant consideration. The records show that the stockholders did not revoke nor nullify these resolutions granting gratuities to complainants.

On record, it appears that the said resolutions arose from the legitimate creation of the Board of Directors who steered the corporate affairs of the corporation. . . .

Respondents' (petitioners') allegation that the three (3) complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Mamaril, who had resigned after filing the complaint on February 8, 1982, were precluded to (sic) receive gratuity because the said resolutions referred to only retiring employee could not be given credence. A reading of Resolutions dated 17 August 1981 and 1 September 1981 disclosed that there were periods mentioned for the payment of complainants' gratuities. This disproves respondents' argument allowing gratuities upon retirement of employees. Additionally, the proposed distribution of assets (Exh. C-1) filed by Mr. Arturo F. Lopez also made mention of gratuity pay, " . . . (wherein) an employee who desires to resign from the LRI will be given the gratuity pay he or she earned." (Emphasis supplied) Let us be reminded, too, that the complainants' resignation was not voluntary but it was pressurized (sic) due to "power struggle" which was evident between Arturo Lopez and Asuncion Gonzales.

The respondents' (petitioners') contention of a mistake to have been committed in granting the first two (2) installments of gratuities to complainants Perfecto Bautista, Florentina Fontecha, Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on. The record is bereft of any evidence that the Board of Directors had passed a resolution nor is there any minutes of whatever nature proving mistakes in the award of damages (sic).

With regard to the award of service incentive leave and others, the Commission finds no cogent reason to disturb the appealed decision.

We affirm.

WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let the instant appeal (be) dismissed for lack of merit.

SO ORDERED.

Petitioners reconsidered. 7 In their motion for reconsideration, petitioners assailed the validity of the board resolutions passed on August 17, 1981 and September 1, 1981, respectively, and claimed, for the first time, that petitioner Asuncion Lopez Gonzales was not notified of the special board meetings held on said dates. The motion for reconsideration was denied by the Second Division on July 24, 1986.

On September 4, 1986, petitioners filed another motion for reconsideration. Again, the motion was denied by public respondent in a Minute Resolution dated November 19, 1986. 8

Hence, the petition. As prayed for, we issued a Temporary Restraining Order, 9 enjoining public respondent from enforcing or executing the Resolution, dated November 20, 1986 (sic), in NLRC-NCR-2-2176-82. 10

The sole issue is whether or not public respondent acted with grave abuse of discretion in holding that private respondents are entitled to receive their gratuity pay under the assailed board resolutions dated August 17, 1951 and September 1, 1981.

Petitioners contend that the board resolutions passed on August 17, 1981 and September 1, 1981, granting gratuity pay to their retained employees, are ultra vires on the ground that petitioner Asuncion Lopez Gonzales was not duly notified of the said special meetings. They aver, further, that said board resolutions were not ratified by the stockholders of the corporation pursuant to Section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). They also insist that the gratuity pay must be given only to the retiring employees, to the exclusion of the retained employees or those who voluntarily resigned from their posts.

At the outset, we note that petitioners allegation on lack of notice to petitioner Asuncion Lopez Gonzales was raised for the first time in the in their motion for reconsideration filed before public respondent National Labor Relations Commission, or after said public respondent had affirmed the decision of the labor arbiter. To stress, in their appeal before the NLRC, petitioners never raised the issue of lack of notice to Asuncion Lopez Gonzales. The appeal dealt with (a) the failure of the stockholders to ratify the assailed resolutions and (b) the alleged "mistake" committed by petitioner corporation in giving the gratuity pay to some of its employees who are yet to retire from employment.

In their comment, 11 private respondents maintain that the new ground of lack of notice was not raised before the labor arbiter, hence, petitioners are barred from raising the same on appeal. Private respondents claim, further, that such failure on the part of petitioners, had deprived them the opportunity to present evidence that, in a subsequent special board meeting held on September 29, 1981, the subject resolution dated September 1, 1981, was unanimously approved by the board of directors of petitioner corporation, including petitioner Asuncion Lopez Gonzales. 12

Indeed, it would be offensive to the basic rules of fair play and justice to allow petitioners to raise questions which have not been passed upon by the labor arbiter and the public respondent NLRC. It is well settled that questions not raised in the lower courts cannot, be raised for the first time on appeal. 13 Hence, petitioners may not invoke any other ground, other than those it

specified at the labor arbiter level, to impugn the validity of the subject resolutions.

We now come to petitioners' argument that the resolutions passed by the board of directors during the special meetings on August 1, 1981, and September 1, 1981, were ultra vires for lack of notice.

The general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. 14 Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. 15

Be that as it may, jurisprudence 16 tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Thus, in one case, 17 it was held:

. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) sec. 429, at page 290, it is stated:

Thus, acts of directors at a meeting which was illegal because of want of notice may be ratified by the directors at a subsequent legal meeting, or by the corporations course of conduct. . .

Fletcher, supra, further states in sec. 762, at page 1073-1074:

Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from adoption of the act, acceptance or acquiescence. Ratification may be effected by a resolution or vote of the board of directors expressly ratifying previous acts either of corporate officers or agents; but it is not necessary, ordinarily, to show a meeting and formal action by the board of directors in order to establish a ratification.

In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp. 606, 611 (D.N.D. 1964), the court stated:

Moreover, the unauthorized acts of an officer of a corporation may be ratified by the corporation by conduct implying approval and adoption of the act in question. Such ratification may be express or may be inferred from silence and inaction.

In the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor nullifying the board resolutions granting gratuity pay to private respondents. Instead, they paid the gratuity pay, particularly, the first two (2) installments thereof, of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the assailed resolutions were passed, we can glean from the records that she was aware of the

corporation's obligation under the said resolutions. More importantly, she acquiesced thereto. As pointed out by private respondents, petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. 81-10-510 and 81-10-506, both dated October 15, 1981, evidencing the 2nd

installment of the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. 18

We hold, therefore, that the conduct of petitioners after the passage of resolutions dated August, 17, 1951 and September 1, 1981, had estopped them from assailing the validity of said board resolutions.

Assuming, arguendo, that there was no notice given to Asuncion Lopez Gonzalez during the special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state that the resolutions passed by the board during the said meetings were ultra vires. In legal parlance, "ultra vires" act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the powers so conferred. 19

The assailed resolutions before us cover a subject which concerns the benefit and welfare of the company's employees. To stress, providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to avoid any liability arising from the issuance the subject resolutions. 20

We reject petitioners' allegation that private respondents, namely, Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned from petitioner corporation after the filing of the case, are precluded from receiving their gratuity pay. Pursuant to board resolutions dated August 17, 1981 and September 1, 1981, respectively, petitioner corporation obliged itself to give the gratuity pay of its retained employees in four (4) installments: on September 1, 1981; October 15, 1981; November, 1981; and January 1, 1982. Hence, at the time the aforenamed private respondents tendered their resignation, the aforementioned private respondents were already entitled to receive their gratuity pay.

Petitioners try to convince us that the subject resolutions had no force and effect in view of the non-approval thereof during the Annual Stockholders' Meeting held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). We are not persuaded.

The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. In such a case, the action taken by the board of directors requires the authorization of the stockholders on record.

It will be observed that, except far Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of directors. Under the circumstances in field, it will be illogical and superfluous to require the stockholders' approval of the subject resolutions. Thus, even without the stockholders' approval of the subject resolutions, petitioners are still liable to pay private respondents' gratuity pay.

IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and the temporary restraining order we issued on February 9, 1987 is LIFTED. Accordingly, the assailed resolution of the National Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED. This decision is immediately executory. Costs against petitioners.

SO ORDERED.

4. G.R. No. L-27972 June 30, 1970

CENTRAL COOPERATIVE EXCHANGE, INC., petitioner, vs.CONCORDIO TIBE, SR. and THE HONORABLE COURT OF APPEALS, respondents.

Review, on certiorari, of a decision of the Court of Appeals (in its Case No. 36202-R), affirming the decision of the Court of First Instance of Manila (in its Civil Case No. 44536) dismissing after trial a complaint filed by herein petitioner, Central Cooperative Exchange, Inc. (CCE for short), against herein respondent, Concordio Tibe, Sr., for the refund of certain amounts received by the latter from the corporation, while he served as a member of the board of directors of the Exchange.

The petitioner is a national federation of farmers' cooperative marketing associations, or FACOMAS, scattered throughout the country; its single majority stockholder is the former Agricultural Credit and Cooperative Financing Administration (ACCFA), now Agricultural Credit Administration (ACA). As a member of the petitioner's board of directors from 23 May 1958 to 26 May 1960, representing FACOMAS in Eastern Visayas, respondent Concordio Tibe, Sr. drew and collected from petitioner CCE cash advances amounting to P5,668.00; of this sum, respondent had, admittedly, already liquidated P3,317.25, leaving the sum of P2,350.75 still to be accounted for. By admission of the petitioner the sum of P2,350.75 has been further reduced to P2,133.45 as of 31 January 1963 on account of partial payments made after suit was filed (Petitioner's Brief, page 17). Respondent Tibe had also drawn several sums, amounting to P14,436.95, representing commutable per diems for attending meetings of the Board of Directors in Manila, per diems and transportation expenses for FACOMA visitations, representation expenses and cummutable discretionary funds. All these sums were disbursed with the approval of general manager, treasurer and auditor of CCE.

The main issue is whether or not the board of directors of the CCE had the power and authority to adopt various resolutions which appropriated the funds of the corporation for the above-enumerated expenses for the members of the said board.

Section 8 of the By-Laws of petitioner federation provides:

The compensation, if any, and the per diems for attendance at meetings of the members of the Board of Directors shall be determined by the members at any annual meeting or special meeting of the Exchange called for the purpose.

In the annual meeting of the stockholders, held in Manila on 31 January 1956, it was resolved that:

The members of the Board of Directors attending the CCE board meetings be entitled to actual transportation

expenses plus the per diems of P30.00 and actual expenses while waiting.<äre||anº•1àw>

The resolutions of the Board of Directors under which respondent Tibe drew and collected the sums of money sought to be recovered, and which petitioner claims are invalid resolutions, are the following:

(a) Res. No. 55, May 5, 1957, authorizing:

1. Visitation of FACOMAS, in order to be official, must be with prior sanction or authority of the board, except when it is urgent, in which case Board confirmation is needed;

2. Per diem of P10.00 is authorized for visitations outside the place of residence of the director concerned;

3. Actual transportation expenses allowed for all visitations sanctioned or authorized by the board.

(b) Res. No. 52, July 8, 1958, appropriating P10,000.00 as discretionary fund of the board of directors, disbursement from which will be made upon authorization of the board chairman and for which no supporting receipts need be presented,

(c) Res. No. 49, July 10, 1958, granting monthly commutable allowance of P200.00 to each director starting from July 1, 1958, in lieu of the regular waiting time per diems and transportation expenses while in the City of Manila attending Board and committee meetings.

(d) Res. No. 57, July 24, 1958, amending Res. No. 49 by adding P20.00 to the P200.00 as commutable transportation allowances while attending meetings in Manila.

(e) Res. No. 35, June 11, 1959, increasing the monthly commutable allowance for each director from P300.00 to P500.00 per month effective June 1, 1959.

(f) Res. No. 87, October 9, 1959, appropriating P10,000.00 as commutable discretionary fund of the board of directors.

We agree with the petitioner that the questioned resolutions are contrary to the By-Laws of the federation and, therefore, are not within the power of the board of directors to enact. The By-Laws, in the aforequoted Section 8, explicitly reserved unto the stockholders the power to determine the compensation of members of the board of directors, and the stockholders did restrict such compensation to "actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting." Even without the express reservation of said power, the directors are not entitled to compensation, for —

... The law is well-settled that directors of corporations presumptively serve without compensation and in the absence of an express agreement or a resolution in relation thereto, no claim can be asserted therefor (Sec. 2110, 5 Fletcher 375-376). Thus it has been held that there can be no recovery of compensation, unless

expressly provided for, when a director serves as president or vice president, as secretary, as treasurer or cashier, as a member of an executive committee, as chairman of a building committee, or similar offices (Sec. 2112, 5, Fletcher 381-382). (Alvendia, The Law of Private Corporations in the Philippines, pages 275-276)

Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as expressed in the By-Laws.

Nor may the directors rely on Section 28 of the Corporation Law, giving the exercise of corporate powers and the control of the corporation's business and property to the board of directors, or on Section 1 of Article VI of the By-Laws, empowering the board with "general supervision and control of the affairs and property of the Exchange," as justifications for the adoption of the questioned resolutions, because these provisions of the law and the By-Laws pertain to the board's general powers merely and do not extend to giving the members of the said board the compensations stated in the resolution, as the matter of providing for their compensations are specifically withheld from the board of directors, and reserved to the stockholders.

It is vain for the respondent to rely on the good intentions of the board, that the board, for reasons of expediency and economy", cancelled the per diems and actual transportation and waiting expenses provided by the stockholders and substituted these by monthly commutable allowances of P200.00 (per Resolution No. 49) because the court is not concerned with the propriety or wisdom of the measure of compensation already fixed by stockholders, but which the directors wanted to correct by increase thereof (Government of P.I. vs. El Hogar Filipino, 50 Phil. 399).

As stated earlier, respondent Tibe was a director of the corporation from May, 1958 to May, 1960. During his term, he collected the sums of money appropriated in and pursuant to the board resolutions. Suit was filed against respondent on 22 October 1960. One of the grounds of the appealed decision in finding for the respondent is that the petitioner's claim is barred by laches. We do not agree. The board of directors, under the By-Laws of the corporation, had the control of the affairs of the corporation and it is not to be expected that the board would sue its members to recover the sums of money voted by and for themselves. We think that, under the circumstances, where the corporation was virtually immobilized from commencing suit against its directors, laches does not begin to attach against the corporation until the directors cease to be such (Cf. Bates Street Shirt Co. v. Waite, 156 Atl. 293, 297, and cases cited therein). From May, 1960, when respondent ceased to be a director, to October, 1960, when action was filed, is too short a time for the claim to be considered stale.

The Court of Appeals plainly erred in not granting petitioner's claim on the cash advances. In the course of the trial, respondent admitted liability therefor (T.s.n., 4 March 1965, pages 7-8). Having admitted liability for the cash advances, respondent waived all defenses thereto, including laches, and there was nothing left for the court to have done but to order payment. The appellate court argued that it would not be easy for the respondent to produce the disbursement receipts covering the cash advances. This is certainly no reason for disapproving petitioner's claim; those receipts are no longer necessary, for the liability was admitted.

FOR THE FOREGOING REASONS, the decision under review is hereby reversed, and another one entered ordering the respondent to pay unto

the petitioner the sums of P1,730.35 and P14,436.95, with legal interests on both sums from 22 October 1960 until fully paid. Costs against the respondent.

5. [G.R. No. 113032. August 21, 1997]

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS,petitioners, vs. RICARDO T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.

Up for review on certiorari are: (1) the Decision September 6, 1993 and (2) the order dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal Cases Nos. 37097 and 37098 for estafa and falsification of a public document, respectively. The judgment acquitted the private respondents of both charges, but petitioners seek to hold them civilly liable.

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. (WIT, for short), a stock corporation engaged in the operation, among others, of an educational institution. According to petitioners, the minority stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board meeting was held. In attendance were other members of the Board including one of the petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were distributed to all Board Members. The notice allegedly indicated that the meeting to be held on June 1, 1986 included item No. 6 which states:

"Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the corporation." [1]

In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation to the private respondents as corporate officers retroactive June 1, 1985, viz.:

“Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:

‘The Officers of the Corporation be granted monthly compensation for services rendered as follows: Chairman - P9,000.00/month, Vice-Chairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month and Corporate Secretary - P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and superceed(sic) any previous resolution.’

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary”[2]

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of the City Prosecutor of Iloilo, as a result of which two (2) separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was anchored on the private respondents’ submission of WIT’s income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of private respondents based on Resolution No. 4, series of 1986, making it appear that the same was passed by the board on March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not covered by the corporation’s fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986). The information for falsification of a public document states:

“The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S. SALAS (whose dates and places of birth cannot be ascertained) of the crime of FALSIFICATION OF A PUBLC DOCUMENT, Art. 171 of the Revised Penal Code, committed as follows:

That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines and within the jurisdiction of this Honorable Court, the above-named accused, being then the Chairman, Vice-Chairman, Treasurer, Secretary and Trustee (who later became the secretary), respectively, of the board of trustees of the Western Institute of Technology, Inc., a corporation duly organized and existing under the laws of the Republic of the Philippines, conspiring and confederating together and mutually helping one another, to better realized (sic) their purpose, did then and there wilfully, unlawfully and criminally prepare and execute and subsequently cause to be submitted to the Securities and Exchange Commission an income statement of the corporation for the fiscal year 1985-1986, the same being required to be submitted every end of the corporation fiscal year by the aforesaid Commission and therefore, a public document, including therein the disbursement of the retroactive compensation of accused corporate officers in the amount of P186,470.70, by then and there making it appear that the basis thereof Resolution No. 4, Series of 1986 was passed by the board of trustees on March 30, 1986, a date covered by the corporation’s fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when in truth and in fact, as said accused well knew, no such Resolution No. 48, Series of 1986 was passed on March 30, 1986.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22,1991.”[3] [Underscoring ours].

The Information, on the other hand, for estafa reads:

“The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS (whose dates and places of birth cannot be ascertained) of the crime of ESTAFA, Art. 315, par 1(b) of the Revised Penal Code, committed as follows:

That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines and within the jurisdiction of this Honorable Court, the above-named accused, being then the Chairman, Vice-Chairman, Treasurer, Secretary and Trustee (who later became the secretary), respectively, of the board of trustees of the Western Institute of Technology, Inc., a corporation duly organized and existing under the laws of the Republic of the Philippines, conspiring and confederating together and mutually helping one another, to better realize their purpose, did then and there wilfully, unlawfully and feloniously defraud the said corporation (and its stockholders) in the following manner, to wit: herein accused, knowing fully well that they have no sufficient, lawful authority to disburse--- let alone violation of applicable laws and jurisprudence, disbursed the funds of the corporation by effecting payment of their retroactive salaries in the amount of P186,470.70 and subsequently paying themselves every 15th and 30th of the month starting June 15, 1986 until the present, in the amount ofP19,500.00 per month, as if the same were their own, and when herein accused were informed of the illegality of these disbursements by the minority stockholders by way of objections made in an annual stockholders’ meeting held on June 14, 1986 and every year thereafter, they refused, and still refuse, to rectify the same to the damage and prejudice of the corporation (and its stockholders) in the total sum of P1,453,970.79 as of November 15, 1991.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22,1991.”[4] [Underscoring ours]

Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and 37098, was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both counts[5] dated September 6, 1993 without imposing any civil liability against the accused therein.

Petitioners filed a Motion for Reconsideration[6] of the civil aspect of the RTC Decision which was, however, denied in an Order dated November 23, 1993.[7]

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994, was filed before this Court by Western Institute of Technology, Inc., supposedly one of the petitioners herein, disowning its inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for the other petitioners, had no authority whatsoever to represent the corporation in filing the petition. Intervenor likewise prayed for the dismissal of the petition for being utterly without merit. The Motion for Intervention was granted on January 16, 1995.[8]

Petitioners would like us to hold private respondents civilly liable despite their acquittal in Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal issuance by private respondents of Resolution No. 48, series of 1986 ordering the disbursement of corporate funds in the amount of P186,470.70 representing the retroactive compensation as of June 1, 1985 in favor of private respondents, board members of WIT, plus P1,453,970.79 for the subsequent collective salaries of private respondent every 15th and 30th of the month until the filing of the criminal complaints against them on March 1991. Petitioners maintain that this grant of compensation to private respondents is proscribed under Section 30 of the Corporation Code. Thus, private respondents are obliged to return these amounts to the corporation with interest.

We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:

“Sec. 30. Compensation of directors.--- In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems:Provided,

however, That any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.” [Underscoring ours]

There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors /trustees render service gratuitously and that the return upon their shares adequately furnishes the motives for service, without compensation[9] Under the foregoing section, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders’ meeting agree to give it to them.

This proscription, however, against granting compensation to directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: “xxx [T]he directors shall not receive any compensation, as such directors, xxx.” The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees.[10] In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology. We quote once more Resolution No. 48, s. 1986 for easy reference, viz.:

“Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:

‘The Officers of the Corporation be granted monthly compensation for services rendered as follows: Chairman - P9,000.00/month, Vice-Chairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month andCorporate Secretary - P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and superceed(sic) any previous resolution.’

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary”[11] [Underscoring ours]

Clearly, therefore , the prohibition with respect to granting compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case. Consequently, the last sentence of Section 30 which provides:

“xxx xxx. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.” [Underscoring ours]

does not likewise find application in this case since the compensation is being given to private respondents in their capacity as officers of WIT and not as board members.

Petitioners assert that the instant case is a derivative suit brought by them as minority shareholders of WIT for and on behalf of the corporation to annul Resolution No. 48, s. 1986 which is prejudicial to the corporation.

We are unpersuaded. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue.[12] It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.[13] Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join.[14] This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of the action.[15] This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which, in part, merely states that “this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098” [16] since the trial court’s judgment of acquittal failed to impose any civil liability against the private respondents. By no amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.

Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The case should have been filed with the Securities and Exchange Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5(b) of P.D. No. 902-A:

“In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

xxx xxx xxx

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity;

xxx xxx xxx.” [Underscoring ours]

Once the case is decided by the SEC, the losing party may file a petition for review before the Court of Appeals raising questions of fact, of law, or mixed questions of fact and law.[17] It is only after the case has ran this course, and not earlier, can it be brought to us via a petition for review on certiorari under Rule 45 raising only pure questions of law.[18] Petitioners, in pleading that we treat the instant petition as a derivative suit, are trying to short-circuit the entire process which we cannot here sanction.

As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification of public document and estafa, which this petition truly is, we have to deny the petition just the same. It will be well to quote the respondent court’s ratiocinations acquitting the private respondents on both counts:

“The prosecution wants this Court to believe and agree that there is falsification of public document because, as claimed by the prosecution, Resolution No. 48, Series of 1986 (Exh. ‘1-E-1’) was not taken up and passed during the Regular Meeting of the Board of Trustees of the western Institute of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986 special meeting of the same board of trustees.

This Court is reluctant to accept this claim of falsification. The prosecution omitted to submit the complete minutes of the regular meeting of the Board of Trustees on March 30, 1986. It only presented in evidence Exh. ‘C’, which is page 5 or the last page of the said minutes. Had the complete minutes (Exh. “1’ consisting of five (5) pages, been submitted, it can readily be seen and understood that Resolution No. 48, Series of 1986 (Exh. ‘1-E-1’) giving compensation to corporate officers, was indeed included in Other Business, No. 6 of the Agenda, and was taken up and passed on March 30, 1986. The mere fact of existence of Exh. ‘C’ also proves that it was passed on March 30, 1986 for Exh,. ‘C’ is a part and parcel of the whole minutes of the Board of Trustees Regular Meeting on March 30, 1986. No better and more credible proof can be considered other than the Minutes (Exh. ‘1’) itself of the Regular Meeting of the Board of Trustees on March 30, 1986. The imputation that said Resolution No.48 was neither taken up nor passed on March 30, 1986 because the matter regarding compensation was not specifically stated or written in the Agenda and that the words ‘possible implementation of said Resolution No. 48, was expressly written in the Agenda for the Special Meeting of the Board on June 1, 1986, is simply an implication. This evidence by implication to the mind of the court cannot prevail over the Minutes (Exh. ‘1’) and cannot ripen into proof beyond reasonable doubt which is demanded in all criminal prosecutions.

This Court finds that under the Eleventh Article (Exh. ‘3-D-1’) of the Articles of Incorporation (Exh. ‘3-B’) of the Panay Educational Institution, Inc., now the Western Institute of Technology, Inc., the officers of the corporation shall receive such compensation as the Board of Directors may provide. These Articles of Incorporation was adopted on May 17, 1957 (Exh. ‘3-E’). The Officers of the corporation and their corresponding duties are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of the Amended By-Laws of the Corporation (Exh. ‘4-A’) which was adopted on May 31, 1957. According to Sec. 6, Art. III of the same By-Laws, all officers shall receive such compensation as may be fixed by the Board of Directors.

It is the perception of this Court that the grant of compensation or salary to the accused in their capacity as officers of the corporation, through Resolution No. 48, enacted on March 30, 1986 by the Board of Trustees, is authorized by both the Articles of Incorporation and the By-Laws of the Corporation. To state otherwise is to depart from the clear terms of the said articles and by-laws. In their defense the accused have properly and rightly asserted that the grant of salary is not for directors, but for their

being officers of the corporation who oversee the day to day activities and operations of the school.

xxx xxx xxx

xxx [O]n the question of whether or not the accused can be held liable for estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is perceived by this Court that the receipt and the holding of the money by the accused as salary on basis of the authority granted by the Articles and By-Laws of the corporation are not tainted with abuse of confidence. The money they received belongs to them and cannot be said to have been converted and/or misappropriated by them.

xxx xxx xxx.”[19] [Underscoring ours]

From the foregoing factual findings, which we find to be amply substantiated by the records, it is evident that there is simply no basis to hold the accused, private respondents herein, civilly liable. Section 2(b) of Rule 111 on the New Rules on Criminal Procedure provides:

“SEC. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist.”[Underscoring ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

“SEC. 2. Form and contents of judgment.

xxx xxx xxx

In case of acquittal, unless there is a clear showing that the act from which the civil liability might arise did not exist, the judgment shall make a finding on the civil liability of the accused in favor of the offended party.” [Underscoring ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable doubt but rather on a finding that the accused-private respondents did not commit the criminal acts complained of. Thus, pursuant to the above rule and settled jurisprudence, any civil action ex delicto cannot prosper. Acquittal in a criminal action bars the civil action arising therefrom where the judgment of acquittal holds that the accused did not commit the criminal acts imputed to them.[20]

WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.

SO ORDERED.

6. G.R. No. 111008 November 7, 1994

TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners, vs.HON. COURT OF APPEALS AND MELCHOR DE LA CUESTA, respondents.

This petition for review on certiorari challenges the 04th March 1993 decision of the Court of Appeals and its resolution of 01 July 1993 denying the motion for reconsideration.

On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. ("Tramat"), one (1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00 (apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67,000.00. David Ong caused a "stop payment" of the check when NAWASA refused to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the engine (sold by de la Cuesta) was a reconditioned unit.

On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer, averred, among other things, that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit.

On 02 November 1989, after the reception of evidence, the trial court rendered a decision, the dispositive portions of which read:

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

1. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of P33,500.00 with legal interest thereon at the rate of 12% per annum from July 7, 1984 until fully paid; and

2. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of P10,000.00 as attorney's fees, and the costs of this suit.

SO ORDERED. 1

An appeal was timely interposed by the defendants. On 04 March 1993, the Court of Appeals affirmed in toto the decision of the trial court. Defendant-appellants' motion for reconsideration was denied.

Hence, the instant petition.

We could find no reason to reverse the factual findings of both the trial court and the appellate court, particularly in holding that the contract between de la Cuesta and TRAMAT was one of absolute, not conditional, sale of the tractor and that de la Cuesta did not violate any warranty on the sale of the tractor to TRAMAT. The appellate court, in its decision, adequately explained:

If the perfection of the sale was dependent upon acceptance by the MWSS of the subject tractor why did the appellants issue a check in payment of the item to the appellee? And long after MWSS had complained about the defective tractor engine, and after the appellee had failed to remedy the defect, why did the appellants still draw and deliver a replacement check to the appellee for the increased amount of P33,500.00?

These payments argue against the claim now made by the defendants that the sale was conditional.

According to the appellee, the additional amount covered the cost of replacing the oil gasket of the tractor engine when it was repaired in Soledad Cac's gasoline station in Quezon City. The appellants, on the other hand, claims the amount represented the freight charges for transporting the tractor from Cauayan, Isabela to Metro Manila.

The appellants should have explained why they failed to include the freight charges in the first check. The tractor was transported from Isabela to Metro Manila as early as April 1984, and the first check was drawn at about the same time. The freight charges cannot be said to have been incurred when the tractor engine was delivered back to the supplier for repairs. The appellants admitted that the engine was not brought back to Isabela. The repairs were done at Soledad Cac's gasoline station in Quezon City.

Anent the first assigned error, We sustain the trial court's finding that at the time of the purchase, the appellants did not reveal to the appellee the true purpose for which the tractor would be used. Granting that the appellants informed the appellee that they would be reselling the unit to the MWSS, an entity admittedly not engaged in farming, and that they ordered the tractor without the power tiller, an indispensable accessory if the tractor would be used in farming, these in themselves would not constitute the required implied notice to the appellee as seller.

xxx xxx xxx

In regard to the second assigned error, We do not agree that the appellee should have been held liable for the tractor's alleged hidden defects. . . .

It has to be noted in this regard that, to satisfy the requirements of the MWSS, the appellants borrowed a lawn mower from the MWSS so they could fabricate one such mower. The appellants' witness stated that the kind of mid-mounted lawn mower was being manufactured by their competitor, Alpha Machinery, which had by then stopped supplying the same (tsn, Nov. 29, 1988, pp. 73-74). There is no showing that the appellants had had any previous experience in the fabrication of this lawn mower. In fact, as aforesaid, they had to borrow one from the MWSS which they could copy. But although they made a copy with the same specifications and design, there was no assurance that the copy would function as well as with the model.

xxx xxx xxx

Although the trial court discussed it in a different light, We view the matter in the same way the trial court did — that the lawn mower as fabricated by the appellants was the root of the parties' problems.

Having had no previous experience in the manufacture of lawn mowers of the same type as that in litigation, and in a possibly patent-infringing effort to undercut their competition, the appellants gathered enough

daring to do the fabrication themselves. But the product might have proved too much for the subject tractor to power, and the tractor's engine was strained beyond its limits, causing it to overheat and damage its gaskets.

No wonder, then, it was a gasket Soledad Cac had to replace, at a cost chargeable to the appellants. No wonder, furthermore, the appellants' witness declared that even after the replacement of that one gasket, the engine still leaked oil after being torture-tested. The integrity of the other engine gaskets might have been impaired, too. Such was the burden placed on the engine. The engine malfunctioned not necessarily because the engine, as alleged by the appellants, had been a reconditioned, and not a brand new, one. It malfunctioned because it was made to do what it simply could not. 2

It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon. 3

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when —

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 4

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 5

3. He agrees to hold himself personally and solidarily liable with the corporation; 6 or

4. He is made, by a specific provision of law, to personally answer for his corporate action. 7

In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases.

WHEREFORE, the petition is given DUE COURSE and the decision of the trial court, affirmed by the appellate court, is MODIFIED insofar as it holds petitioner David Ong jointly and severally liable with Tramat Mercantile, Inc., which portion of the questioned judgment is SET ASIDE. In all other respects, the decision appealed from is AFFIRMED. No costs.

SO ORDERED.

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

PRIME WHITE CEMENT CORPORATION, petitioner, vs.HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per month;

b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be hissub-dealer in the Mindanao area.

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969, entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation in his letter dated August 18, 1970 that he is making the necessary preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for

the month of September, 1970 (Exhibit B), looking forward to the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to impose the following conditions:

a. Delivery of white cement shall commence at the end of November, 1970;

b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered;

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

d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic);

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;

g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white cement. (Exhibit C).

xxx xxx xxx

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant corporation, in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were

duly authorized to enter into the said agreement and signed the same for and in behalf of the corporation. When they, therefore, entered into the said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now be said that the disputed agreement which possesses all the essential requisites of a valid contract was never intended to bind the corporation as this avoidance is barred by the principle of estoppel. 3

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4

I

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

II

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

III

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.

IV

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.

V

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of the respondent Court that it is.

Under the Corporation Law, which was then in force at the time this case arose, 5 as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a person outside the corporation.

The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:

. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .

On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision substantially incorporates well-settled principles in corporate law. 12

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at thefixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts were entered into soon after his "dealership agreement" with petitioner corporation, and in each one of them he protected himself from any increase in the market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two years from October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"? For that matter, why did the President and the Chairman of the Board not do so either? As director, specially since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have been prejudiced. However, there can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.

SO ORDERED.

8. [G.R. No. 121434. June 2, 1997]

ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents.

Sought to be reversed in this special civil action for certiorari and prohibition are the Resolutions of public respondent National Labor Relations Commission (NLRC, for brevity), dated September 30, 1993, December 7, 1995, and May 24, 1995, holding petitioners herein liable for the illegal dismissal of private respondents and ordering them to pay the latter separation pay plus backwages.

Private respondents were employed by Crispa, Inc. for many years in the latter's garments factory located in Pasig Boulevard, Pasig City. Sometime in September, 1991, private respondents' services were terminated on the ground of retrenchment due to alleged serious business losses suffered by Crispa, Inc. in the years immediately preceding 1990. Thereafter, respondent employees, on November, 1991, filed before the NLRC, National Capital Region, Manila, three (3) separate complaints for illegal dismissal and diminution of compensation against Crispa, Inc., Valeriano Floro , and the petitioners. Valeriano Floro was a major stockholder, incorporator and Director of Crispa, Inc., while the petitioners were high ranking officers and directors of the company. Said complaints were consolidated in order to expedite the proceedings. The case was assigned to Labor Arbiter Raul Aquino.

On July 20, 1992, after due hearing, Labor Arbiter Aquino rendered a decision dismissing the complaints for illegal dismissal but at the same time ordering Crispa, Inc., Floro and the petitioners to pay respondent

employees separation pays equivalent to seventeen (17) days for every year of service, viz:

"WHEREFORE, premises considered, the instant complaint for illegal dismissal is hereby DISMISSED for lack of merit. However, as discussed in this decision, respondents is (sic) hereby directed to pay the separation pay of the complainants equivalent to seventeen (17) days for every year of service and computed as follows:

x x x x x x x x x

All other claims are hereby dismissed for lack of merit. Respondent is hereby ordered to pay 10% attorney's fees based on the award.

SO ORDERED."[1]

Dissatisfied, private respondents appealed before the public respondent NLRC. In a Resolution dated September 30, 1993, the Second Division of the NLRC found Crispa, Inc., Valeriano Floro, together with the petitioners liable for illegal dismissal and modified the award of separation pay in the amount of one (1) month for every year of service instead of seventeen (17) days, towit:

"WHEREFORE, the assailed Decision is hereby Affirmed with Modification in so far as the award of separation pay is concerned to the effect that respondents are ordered to pay complainants one month for every year of service, instead of 17 days.

All other rulings are hereby AFFIRMED."[2]

Petitioners filed a Motion for Reconsideration on November 12, 1993 but the same was denied by the NLRC in a Resolution dated December 7, 1993, thus:

"After due consideration of the Motion for Reconsideration filed by respondents on November 12, 1995, from the Resolution of September 30, 1993, the Commission (Second Division) RESOLVED to deny the same for lack of merit."[3]

On August 8, 1994, private respondents sought a clarification of public respondent NLRC's Resolution dated September 30, 1993 insofar as the computation of separation pay by the Examination and computation division was concerned as well as the failure of the Resolution to award them full backwages despite the finding of illegal dismissal.

On April 21, 1995, the NLRC, treating the Motion to Clarity Judgment as an Appeal, granted the same in this wise:

"ACCORDINGLY, in view of the foregoing, the complainants-appelles Motion to Clarify Judgment is partially GRANTED and Mr. Ricardo Atienza, Acting Chief of the Examination and computation Division is hereby directed to include in the computation, six months backwages as provided for in the September 30, 1993 Resolution of the Division, which was however omitted in the dispositive portion thereof.

SO ORDERED."[4]

Petitioners filed a Motion for Reconsideration of the April 21, 1995 Resolution, which was denied in another Resolution[5] dated May 24, 1995.

Hence, this petition.

We shall dismiss the petition. The law recognizes the right of every business entity to reduce its work force if the same is made necessary by compelling economic factors which would endanger its existence or stability. In spite of overwhelming support granted by the social justice provisions of our Constitution in favor of labor, the fundamental law itself guarantees, even during the process of tilting the scales of social justice towards workers and employees, "the right of enterprises to reasonable returns of investment and to expansion and growth." [6] To hold otherwise would not only be oppressive and inhuman,[7] but also counter-productive and ultimately subversive of the nation's thrust towards a resurgence in our economy which would ultimately benefit the majority of our people. Where appropriate and where conditions are in accord with law and jurisprudence, the Court has authorized valid reductions in the work force to forestall business losses,[8]the hemorrhaging of capital, or even to recognize an obvious reduction in the volume of business which has rendered certain employees redundant.[9] Thus, Article 283 of the Labor Code, which covers retrenchment, reads as follows:

"Art. 283. Closure of establishment and reduction of personnel. - The employer may also terminate the employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the worker and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered as one (1) whole year."

Retrenchment, or "lay-off" in layman's parlance, is the termination of employment initiated by the employer through no fault of the employee's and without prejudice to the latter, resorted to by the management during periods of business recession, industrial depression, or seasonal fluctuations, or during lulls occasioned by lack of orders, shortage of materials, conversion of a plant for a new production program or the introduction of new methods or more efficient machinery, or of automation.[10] Simply put, it is an act of employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction on the volume of his business, a right consistently recognized and affirmed by this court.[11] Nevertheless, while it is true that retrenchment is a management prerogative, it is still subject to faithful compliance with the substantive and procedural requirements laid down by law and jurisprudence. And since retrenchment strikes at the very core of an individual's employment, which may be the only lifeline on which he and his family depend for survival,[12] the burden clearly falls upon the employer to prove economic or business losses with appropriate supporting evidence.[13] Any claim of actual or potential business losses must satisfy certain established standards before any reduction of personnel becomes legal, viz:

"1. The losses expected and sought to be avoided must be substantial and not merely de minimis in extent;

2. The substantial losses apprehended must be reasonably imminent, as such imminence can be perceived objectively and in good faith by the employer;

3. The retrenchment must be reasonably necessary and likely to effectively prevent the expected losses.

4. The alleged losses. If already realized, and the expected imminent losses sought to be forestalled, must be proved by sufficient and convincing evidence."[14]

In sustaining the company's submission that it suffered serious business losses in 1991, thus necessitating the retrenchment of respondent employees, the Labor Arbiter found:

"On the ground invoke by respondent for closing its business, i.e., serious losses and financial straits, responded submitted Financial Report wherein it incurred a net loss of Forty(sic) Three Million Four Hundred Eighteen Thousand Two Hundred Seventy Two and Ninety eight Centavos(P43,418,272.98) in 1991. Thus, based on all the foregoing, we are constrained that respondent was, indeed, suffering from financial reverses that would justify its decision to close down its business. Hence, under Section 9 (b) Book VI, Rule III of Omnibus Rules implementing the Labor Code, it provides:

'Section 9. (b) Where the termination of employment is due to retrenchment to prevent losses and in case of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, or where the employee suffers from a disease and his continued employment is prohibited by law or is prejudicial to his health or the health of his co-employees, the employee shall be entitled to termination pay equivalent to at least one-half month pay for every year of service, a fraction of at least six months being considered as one whole year."'[15]

The NLRC, in its September 30, 1993 Resolution, however, reversed the foregoing findings of the Labor Arbiter and adjudged Crispa, Inc. as well as the petitioners liable for illegal dismissal. The NLRC ruled, thus:

"We observed that the basis of the Labor Arbiter in sustaining the argument of financial reverses is the Statement of Profit and Losses submitted by the respondent (Supra.). The same however, does not bear the signature of a certified public accountant or audited by an independent auditor. Briefly stated, it has no evidentiary value. As such the allege financial losses which cause the temporary closure of respondent CRISPA, Inc. has not been sufficiently established. In the case of Lopez Sugar Corp. vs. FFW, 189 SCRA 179, the Supreme Court held that 'alleged losses if already realized and the expected losses sought to be forestalled must be proved by sufficient and commencing (sic) evidence. Consequently, there being no financial reverses for (sic) men (sic) the termination of herein complainants from their employment is perforce illegal."[16]

We are more in accord with the aforequoted observations made by the NLRC. It is true that administrative and quasi-judicial bodies like the NLRC are not bound by the technical rules of procedure in the adjudication of cases.[17] However, this procedural rule should not be construed as a license to disregard certain fundamental evidentiary rules. While the rules of evidence prevailing in the courts of law or equity are not controlling in proceedings before the NLRC, the evidence presented before it must at least have a modicum of admissibility for it to be given some probative value.[18] The Statement of Profit and Losses submitted by Crispa, Inc. to prove its alleged losses, without the accompanying signature of a certified public accountant or audited by an independent auditor, are nothing but self-serving documents which ought to be treated as a mere scrap of paper devoid of any probative value. For sure, this is not the kind of sufficient and convincing evidence necessary to discharge the burden of proof required of petitioners to establish the alleged losses suffered by Crispa,

Inc. in the years immediately preceding 1990 that would justify the retrenchment of respondent employees. In fact, petitioners, as directors and officers of Crispa, Inc., already concede, albeit quite belatedly, in its Reply to Comment of Public Respondent,[19] the finding of public respondent NLRC that petitioners utterly failed to establish the alleged financial losses borne by Crispa, Inc.,[20] thus making the company guilty of illegal dismissal against the private respondents. According to petitioners, what they are actually assailing is the decision of the NLRC holding them solidarily liable with the company for the payment of separation pay and backwages to the private respondents. It is the contention of the petitioners that the award of backwages and separation pay is a corporate obligation and must therefore be assumed by Crispa, Inc. alone.

We do not agree. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities.[21] There are times, however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such as in the following cases:

“1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons;

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.”[22]

In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith.[23] In this case, it is undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees. They were the ones, who as high-ranking officers and directors of Crispa, Inc., signed the Board Resolution retrenching the private respondents on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for which they can be held jointly and severally liable with Crispa, Inc. for all the money claims of the illegally terminated respondent employees in this case.

WHEREFORE, finding no grave abuse of discretion on the part of the public respondent NLRC, the instant petition is hereby DISMISSED.

Costs against petitioners.

SO ORDERED.

9. G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs.ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO

ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR.,respondents.

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid "persistent reports" that "huge and unusual cash disbursements from the funds of SMC" had been irregularly made, and the resources of the firm extensively used in support of the candidacy of Ferdinand Marcos during the snap elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266 shares of stock at the price of P100.00 per share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement revoked the voting trust above mentioned, and expressed the desire of the 14 corporations to sell the shares of stock "to pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional officer corps, mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving the highest priority to its principal products and extensive support to agriculture programme of' the Government ... 6 Actually, according to Soriano and the other private respondents, the buyer of the shares was a foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the down payment of P500,000,000.00, "from the proceeds of certain loans". 8

At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos, and the sale thereof was "in direct contravention of .. Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets and properties acquired by former President Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The sequestration was subsequently lifted, and the sale allowed to proceed, on representations by San Miguel Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares in one of the companies, etc. However, the sequestration was soon re-imposed by Order of the PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to register any transfer or encumbrance of any of the stock without the PCGG's prior written authority. 10

San Miguel promptly suspended payment of the other installments of the price to the fourteen (14) seller corporations. The latter as promptly sued for rescission and damages. 11

On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the corporation to seven (7) individuals, including Eduardo de los Angeles, "from the sequestered shares registered as street certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be

held in trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined to be the owner/owners of said shares. 12

In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there were tax and other benefits which would redound to the SMC group of companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption of the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was however overruled by private respondents. 14 When his efforts to obtain relief within the corporation and later the PCGG proved futile, he repaired to the Securities and Exchange Commission (SEC).lâwphî1.ñèt

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the foregoing antecedents and the following additional facts, to wit:

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation, Ltd., had met and passed a resolution authorizing the company to borrow up to US $26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to enable the Soriano family to initiate steps and sign an agreement for the purchase of some 33,133,266 shares of San ,Miguel Corporation. 16

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of the loan were deposited in different banks 17 for the account of "Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and announcing that "the Soriano family, friends and affiliates acquired a considerable block of San Miguel Corporation shares only a few days ago .., the transaction .. (having been) made through the facilities of the Manila Stock Exchange, and 33,133,266 shares .. (having thereby been) purchased for the aggregate price of' P3,313,326,600.00." The letters also stated that the purchase was "an exercise of the Sorianos' right to buy back the same number of shares purchased in 1983 by the .. (14 seller corporations)."

d) In implementing the assumption of the Neptunia loan and the purchase agreement for which said loan was obtained, which assumption constituted an

improper use of corporate funds to pay personal obligations of Andres Soriano III, enabling him; to purchase stock of the corporation using funds of' the corporation itself, the respondents, through various subsequent machinations and manipulations, for interior motives and in breach of fiduciary duty, compound the damages caused San Miguel Corporation by, among other things: (1) agreeing to pay a higher price for the shares than was originally covenanted in order to prevent a rescission of the purchase agreement by the sellers; (2) urging UCPB to accept San Miguel Corporation and Neptunia as buyers of the shares, thereby committing the former to the purchase of its own shares for at least 25% higher than the price at which they were fairly traded in the stock exchanges, and shifting to said corporations the personal obligations of Soriano III under the purchase agreement; and (3) causing to be applied to the part payment of P1,800,000.00 on said purchase, various assets and receivables of San Miguel Corporation.

The complaint closed with a prayer for injunction against the execution or consummation of any agreement causing San Miguel Corporation to purchase the shares in question or entailing the use of its corporate funds or assets for said purchase, and against Andres Soriano III from further using or disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC Board's resolution of April 2, 1987 making San Miguel Corporation a party to the purchase agreement; and for damages.

Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:

1 De los Angeles has no legal capacity to sue because —

a) having been merely imposed by the PCGG as a director on San Miguel, he has no standing to bring a minority derivative suit;

b) he personally holds only 20 shares and hence cannotfairly and adequately represent the minority stockholders of the corporation;

c) he has not come to court with clean hands; and

2. The Securities & Exchange Commission has no jurisdiction over the controversy because the matters involved are exclusively within the business judgment of the Board of Directors. 19

Kahn's motion to dismiss was subsequently adopted by his correspondents . 20

The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated September 4, 1987. 21 In her view —

1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law, ownership of even one share only, sufficed to qualify a person to bring a derivative suit;

2) it is indisputable that the action had been brought by de los Angeles for the benefit of the corporation and all the other stockholders;

3) he was a stockholder at the time of the commission of the acts complained of, the number of shares owned by him being to repeat, immaterial;

4) there is no merit in the assertion that he had come to Court with unclean hands, it not having been shown that he participated in the act complained of or ratified the same; and

5) where business judgment transgresses the law, the securities and Exchange Commission always has competence to inquire thereinto.

Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with SEC Case No. 3152.

A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that de los Angeles had no egal capacity to institute the derivative suit, a conclusion founded on the following propositions:

1) a party "who files a derivative suit should adequately represent the interests of the minority stockholders;" since "De los Angeles holds 20 shares of stock out of 121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be remotely said to adequately represent the interests of the minority stockholders, (e)specially so when .. de los Angeles was put by the PCGG to vote the majority stock," a situation generating "a genuine conflict of interest;"

2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as PCGG-nominated director is inconsistent with his assumed role of representative of minority stockholders; not having been elected by the minority, his voting would expectedly consider the interest of the entity which placed him in the board of directors;

3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG cannot exercise acts of dominion over sequestered property, (b) it has only powers of administration, and (c) its voting of sequestered stock must be done only pursuant to its power of administration; and

4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the benefit of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly brought by de los Angeles because —

1) the number of shares owned by him was immaterial, he being a stockholder in his own right;

2) he had not voted in favor of the resolution authorizing the purchase of the shares; and

3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the protection of the interest of the corporation, it having been held that even an unregistered shareholder or an equitable owner of shares and pledgees of shares may be deemed a shareholder for purposes of instituting a derivative suit.

De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals, imputing to the latter the following errors:

1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to the plain remedy available to him, i.e., appeal to the SEC en banc and despite the fact that no question of jurisdiction was involved;

2) having ruled on Kahn's petition on the basis merely of his factual allegations, although he (de los Angeles) had disputed them and there had been no trial in the SEC; and

3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or director of the San Miguel Corporation.

For their part, and in this Court, the respondents make the following assertions:

1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25

2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG), which had "imposed" him on the corporation; since the PCGG had a clear conflict of interest with the minority, de los Angeles, as director of the former, had no legal capacity to sue on behalf of the latter;

3) even assuming absence of conflict of interest, de los Angeles does not fairly and adequately represent the interest of the minority stockholders;

4) the respondents had properly applied for certiorari with the Court of Appeals because —

a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies exercising quasi-judicial functions, and hence file competence to issue the writ of certiorari;

b) the principle of exhaustion of administrative remedies does not apply since the issue involved is one of law;

c) said respondents had no plain, speedy and adequate remedy within SEC;

d) the Order of the SEC Investigating Officer — denying the motion to dismiss — was issued without or in excess of jurisdiction, hence was correctly nullified by the Court of Appeals; and

e) de los Angeles had not raised the issue of absence of a motion for reconsideration by respondents in the SEC case; in any event, such a motion was unnecessary in the premises.

De los Angeles' Reply seeks to make the following points:

1) since the law lays down three (3) requisites for a derivative suit, viz:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of,

b) he has exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) c)the cause of action actually devolves on the corporation, the ,wrongdoing or harm having been caused to the corporation and not to .the particular stockholder bringing the suit;

and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired those shares as early as 1977, (2) he had sought without success to have the board of' directors remedy with wrong, and (3) that wrong was in truth a 'wrong against the stockholders of the corporation, generally, ,and not against him individually — and it was the corporation, and not he, particularly, that would be entitled to the appropriate' relief — the propriety of his suit cannot be gainsaid;

2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals and hence could not claim exclusion from the scope of the doctrine of exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort to certiorari. where a plain, speedy and accurate remedy was available to him in this case, to wit, a motion for reconsideration before the Sec en banc and, contrary to the respondent's claim, De Los Angeles had in fact asserted to this propositions before the Appellate Tribunal; and

3) the respondent had not raised the issue of jurisdiction before the Court of Appeals; indeed, they admit to their Comment that that

issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not fall within the BASECO doctrine since it does not involve any question of ownership of the 33,133,266 sequestered SMC shares but rather, the validity of the resolution of the board of directors for the assumption by the corporation, for the benefit of certain of its officers and stockholders, of liability for loans contracted by another corporation, which is an intra-corporate dispute within the exclusive jurisdiction of the SEC.

1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably indicates his advocacy of the PCGG position. He does not here seek, and his complaint in the SEC does not pray for, the annulment of the purchase by SMC of the stock in question, or even the subsequent purchase of the same stock by others 26which proposition was challenged by (1) one Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of the Manila RTC, said cases having later become subject of G.R. No. 74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this

Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the sequestered stock in fact belonged to coconut planters and oil millers], said case later having become subject of G.R. No. 79459 of this court . 27 Neither does de los Angeles impugn, obviously, the right of the PCGG to vote the sequestered stock thru its nominee directors — as was done by United Coconut Planters Bank and the 14 seller corporations (in SEC Case No. 3005, later consolidated with SEC Case No. 3000 above mentioned, these two (2) cases later having become subject of G.R.No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court).lâwphî1.ñèt 28

The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena, et al 29 an cases of the Commission regarding 'the funds, moneys, assets, and properties illegally acquired or misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court." His complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or "any incidents arising from, incidental to, or related to" any case involving such property, but assets indisputably belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly committed by a majority of its board of directors to answer for loans assumed by a sister corporation, Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which- issue, as already pointed out, de los Angeles, in common with the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the Sandiganbayan, having no relevance whatever to the ownership- of the sequestered stock. The contention, therefore, that in view of this Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the corporation of which they are stockholders . 30

2. The theory that de los Angeles has no personality to bring suit in behalf of the corporation — because his stockholding is minuscule, and there is a "conflict of interest" between him and the PCGG — cannot be sustained, either.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument — that a stockholder, to be considered as qualified to bring a derivative suit, must

hold a substantial or significant block of stock — finds no support whatever in the law. The requisites for a derivative suit 31 are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; 32

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; 33 and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. 34

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation.

3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote as the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or that, not having been elected by the minority stockholders, his vote would necessarily never consider the latter's interests. The proposition is not only logically indefensible, non sequitur, but also constitutes an erroneous conception of a director's role and function, it being plainly a director's duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the company. Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be deemed to be "beholden" to the PCGG, his ownership of these shares being precisely what he invokes as the source of his authority to bring the derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power to vote sequestered shares of stock as an act of dominion but only in pursuance — to its power of administration. The inference is that the PCGG's act of voting the stock to elect de los Angeles to the SMC Board of Directors was unauthorized and void; hence, the latter could not bring suit in the corporation's behalf. The argument is strained and obviously of no merit. As already more than plainly indicated, it was not necessary for de los Angeles to be a director in order to bring a derivative action; all he had to be was a stockholder, and that he was owning in his own right 20 shares of stock, a fact not disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock may not under any circumstances be voted by

the PCGG to elect a director in the company in which such stock is held. On the contrary, that it held such act permissible is evident from the context of its reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to determine the ownership of .. sequestered shares of stock,"'to vote such shares .. at all stockholders' meetings called for the election of directors ..," the only caveat being that the stock is not to be voted simply because the power to do so exists, whether it be to oust and replace directors or to effect substantial changes in corporate policy, programs or practice, but only "for demonstrably weighty and defensible grounds" or "when essential to prevent disappearance or wastage of corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced in Baseco; and absent any showing to the contrary, consistently with the presumption that official duty is regularly performed, it must be assumed to have done so.

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R. SP No. 12857 — setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and dismissing said case — is REVERSED AND SET ASIDE. The further disposition in the appealed decision for the issuance of a writ of preliminary injunction upon the filing and approval of a bond of P500,000.00 by respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued pursuant thereto is lifted. Costs against private respondents.

SO ORDERED.

10. [G.R. No. 108905. October 23, 1997]

GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents.

The question for decision in this case is the right of petitioner’s representative to sit in the board of directors of respondent Grace Village Association, Inc. as a permanent member thereof. For fifteen years – from 1975 until 1989 – petitioner’s representative had been recognized as a “permanent director” of the association. But on February 13, 1990, petitioner received notice from the association’s committee on election that the latter was “reexamining” (actually, reconsidering) the right of petitioner’s representative to continue as an unelected member of the board. As the board denied petitioner’s request to be allowed representation without election, petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of Appeals, which in turn upheld the decision of the HIGC’s appeals board. Hence this petition for review based on the following contentions:

1. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee on December 20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of the Association without the benefit of election is allowed under the law.[1]

Briefly stated, the facts are as follows:

Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village, while private respondents Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election, respectively, in 1990, when this suit was brought.

As adopted in 1968, the by-laws of the association provided in Article IV, as follows:

The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of Directors, composed of eleven (11) members to serve for one (1) year until their successors are duly elected and have qualified.[2]

It appears, that on December 20, 1975, a committee of the board of directors prepared a draft of an amendment to the by-laws, reading as follows:[3]

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN ( P 10.00) PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, petitioner was given a permanent seat in the board of directors of the association. On February 13, 1990, the association’s committee on election in a letter informed James Tan, principal of the school, that “it was the sentiment that all directors should be elected by members of the association” because “to make a person or entity a permanent Director would deprive the right of voters to vote for fifteen (15) members of the Board,” and “it is undemocratic for a person or entity to hold office in perpetuity.”[4] For this reason, Tan was told that “the proposal to make the Grace Christian High School representative as a permanent director of the association, although previously tolerated in the past elections should be reexamined.” Following this advice, notices were sent to the members of the association that the provision on election of directors of the 1968 by-laws of the association would be observed.

Petitioner requested the chairman of the election committee to change the notice of election by following the procedure in previous elections, claiming that the notice issued for the 1990 elections ran “counter to the practice in previous years” and was “in violation of the by-laws (of 1975)” and “unlawfully deprive[d] Grace Christian High School of its vested right [to] a permanent seat in the board.”[5]

As the association denied its request, the school brought suit for mandamus in the Home Insurance and Guaranty Corporation to compel

the board of directors of the association to recognize its right to a permanent seat in the board. Petitioner based its claim on the following portion of the proposed amendment which, it contended, had become part of the by-laws of the association as Article VI, paragraph 2, thereof:

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was sought by the association and that in reply to the query, the SEC rendered an opinion to the effect that the practice of allowing unelected members in the board was contrary to the existing by-laws of the association and to §92 of the Corporation Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in its answer. Additionally, the association contended that the basis of the petition for mandamus was merely “a proposed by-laws which has not yet been approved by competent authority nor registered with the SEC or HIGC.” It argued that “the by-laws which was registered with the SEC on January 16, 1969 should be the prevailing by-laws of the association and not the proposed amended by-laws.”[6]

In reply, petitioner maintained that the “amended by-laws is valid and binding” and that the association was estopped from questioning the by-laws.[7]

A preliminary conference was held on March 29, 1990 but nothing substantial was agreed upon. The parties merely agreed that the board of directors of the association should meet on April 17, 1990 and April 24, 1990 for the purpose of discussing the amendment of the by-laws and a possible amicable settlement of the case. A meeting was held on April 17, 1990, but the parties failed to reach an agreement. Instead, the board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective.

On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioner’s action. The hearing officer held that the amended by-laws, upon which petitioner based its claim, “[was] merely a proposed by-laws which, although implemented in the past, had not yet been ratified by the members of the association nor approved by competent authority”; that, on the contrary, in the meeting held on April 17, 1990, the directors of the association declared “the proposed by-law dated December 20, 1975 prepared by the committee on by-laws . . . null and void” and the by-laws of December 17, 1968 as the “prevailing by-laws under which the association is to operate until such time that the proposed amendments to the by-laws are approved and ratified by a majority of the members of the association and duly filed and approved by the pertinent government agency.” The hearing officer rejected petitioner’s contention that it had acquired a vested right to a permanent seat in the board of directors. He held that past practice in election of directors could not give rise to a vested right and that departure from such practice was justified because it deprived members of association of their right to elect or to be voted in office, not to say that “allowing the automatic inclusion of a member representative of petitioner as permanent director [was] contrary to law and the registered by-laws of respondent association.”[8]

The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September 13, 1990. It cited the opinion of the SEC based on §92 of the Corporation Code which reads:

§92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of the number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period.

The HIGC appeals board denied claims that the school “[was] being deprived of its right to be a member of the Board of Directors of respondent association,” because the fact was that “it may nominate as many representatives to the Association’s Board as it may deem appropriate.” It said that “what is merely being upheld is the act of the incumbent directors of the Board of correcting a long standing practice which is not anchored upon any legal basis.”[9]

Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held that there was no valid amendment of the association’s by-laws because of failure to comply with the requirement of its existing by-laws, prescribing the affirmative vote of the majority of the members of the association at a regular or special meeting called for the adoption of amendment to the by-laws. Article XIX of the by-laws provides:[10]

The members of the Association by an affirmative vote of the majority at any regular or special meeting called for the purpose, may alter, amend, change or adopt any new by-laws.

This provision of the by-laws actually implements §22 of the Corporation Law (Act No. 1459) which provides:

§22. The owners of a majority of the subscribed capital stock, or a majority of the members if there be no capital stock, may, at a regular or special meeting duly called for the purpose, amend or repeal any by-law or adopt new by-laws. The owners of two-thirds of the subscribed capital stock, or two-thirds of the members if there be no capital stock, may delegate to the board of directors the power to amend or repeal any by-law or to adopt new by-laws: Provided, however, That any power delegated to the board of directors to amend or repeal any by-law or adopt new by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the corporation shall so vote at a regular or special meeting. And provided, further, That the Director of the Bureau of Commerce and Industry shall not hereafter file an amendment to the by-laws of any bank, banking institution or building and loan association, unless accompanied by certificate of the Bank Commissioner to the effect that such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by the majority of the members of the association as required by these provisions of the law and by-laws. But petitioner contends that the members of the committee which prepared the proposed amendment were duly authorized to do so and that because the members of the association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and purposes should be considered to have been ratified by them. Petitioner contends:[11]

Considering, therefore, that the “agents” or committee were duly authorized to draft the amended by-laws and the acts done by the “agents” were in accordance with such authority, the acts of the “agents” from the very beginning were lawful and binding on the homeowners (the

principals) per se without need of any ratification or adoption. The more has the amended by-laws become binding on the homeowners when the homeowners followed and implemented the provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly authorized “agents” but express approval and confirmation of what the “agents” did pursuant to the authority granted to them.

Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the board. Says petitioner:

The right of the petitioner to an automatic membership in the board of the Association was granted by the members of the Association themselves and this grant has been implemented by members of the board themselves all through the years. Outside the present membership of the board, not a single member of the Association has registered any desire to remove the right of herein petitioner to an automatic membership in the board. If there is anybody who has the right to take away such right of the petitioner, it would be the individual members of the Association through a referendum and not the present board some of the members of which are motivated by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitioner’s representative a permanent seat in the board of the association, is contrary to law. Petitioner claims that that is not so because there is really no provision of law prohibiting unelected members of boards of directors of corporations. Referring to §92 of the present Corporation Code, petitioner says:

It is clear that the above provision of the Corporation Code only provides for the manner of election of the members of the board of trustees of non-stock corporations which may be more than fifteen in number and which manner of election is even subject to what is provided in the articles of incorporation or by-laws of the association thus showing that the above provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits a non-stock corporation or association from granting one of its members a permanent seat in its board of directors or trustees. If there is no such legal prohibition then it is allowable provided it is so provided in the Articles of Incorporation or in the by-laws as in the instant case.

. . . .

If fact, the truth is that this is allowed and is being practiced by some corporations duly organized and existing under the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation, that whoever is the Archbishop of Manila is considered a member of the board of trustees without benefit of election. And not only that. He also automatically sits as the Chairman of the Board of Trustees, again without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided in the by-laws of this corporation that whoever is the Archbishop of Manila is considered a member of the board of trustees year after year without benefit of any election and he also sits automatically as the Chairman of the Board of Trustees.

It is actually §§28 and 29 of the Corporation Law ¾ not §92 of the present law or §29 of the former one ¾ which require members of the boards of directors of corporations to be elected. These provisions read:

§28. Unless otherwise provided in this Act, the corporate powers of all corporations formed under this Act shall be exercised, all business conducted and all property of such corporations controlled and held by a board of not less than five nor more than eleven directors to be elected from among the holders of stock or, where there is no stock, from the members of the corporation: Provided, however, That in corporations, other than banks, in which the United States has or may have a vested interest, pursuant to the powers granted or delegated by the Trading with the Enemy Act, as amended, and similar Acts of Congress of the United States relating to the same subject, or by Executive Order No. 9095 of the President of the United States, as heretofore or hereafter amended, or both, the directors need not be elected from among the holders of the stock, or, where there is no stock from the members of the corporation. (emphasis added)

§29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting as may be then determined, directors shall be elected to hold their offices for one year and until their successors are elected and qualified. Thereafter the directors of the corporation shall be elected annually by the stockholders if it be a stock corporation or by the members if it be a nonstock corporation, and if no provision is made in the by-laws for the time of election the same shall be held on the first Tuesday after the first Monday in January. Unless otherwise provided in the by-laws, two weeks’ notice of the election of directors must be given by publication in some newspaper of general circulation devoted to the publication of general news at the place where the principal office of the corporation is established or located, and by written notice deposited in the post-office, postage pre-paid, addressed to each stockholder, or, if there be no stockholders, then to each member, at his last known place of residence. If there be no newspaper published at the place where the principal office of the corporation is established or located, a notice of the election of directors shall be posted for a period of three weeks immediately preceding the election in at least three public places, in the place where the principal office of the corporation is established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980,[12] similarly provides:

§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. (Emphasis added)

These provisions of the former and present corporation law leave no room for doubt as to their meaning: the board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officiomembers, i.e., by virtue of and for as long as they hold a particular office. But in the case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the

power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law.[13]

It is probable that, in allowing petitioner’s representative to sit on the board, the members of the association were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of petitioner’s representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated petitioner’s representative and tolerance cannot be considered ratification.

Nor can petitioner claim a vested right to sit in the board on the basis of “practice.” Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioner’s claim that its right is “coterminus with the existence of the association.”[14]

Finally, petitioner questions the authority of the SEC to render an opinion on the validity of the provision in question. It contends that jurisdiction over this case is exclusively vested in the HIGC.

But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as authority for its ruling the opinion of the SEC chairman. The HIGC could have cited any other authority for the view that under the law members of the board of directors of a corporation must be elected and it would be none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

11. G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner, vs.SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00

per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with respondent corporation, which was allowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of respondent corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request, and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. Among the documents requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International,

Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging, among others that the motion has no legal basis; that the demand is not based on good faith; that the motion is premature since the materiality or relevance of the evidence sought cannot be determined until the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that some of the information sought are not part of the records of the corporation and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time the delegation of said power is made, not when the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board. since he failed, to object to other amendments made on the basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws adopted should not be respondent corporation inconsistent with any existing law; that respondent corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its directors might be tempted to put their personal interests over t I hat of the corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the board should not be interfered with: That the by-laws, as amended, are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of respondent corporation, began acquiring shares therein. until September 1976 when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the

Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

Considering the evidence submitted before the Commission by the petitioner and respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the possession, custody and control of the said corporation, it appearing that the same is material and relevant to the issues involved in the main case. Accordingly, the respondents should allow petitioner-movant entry in the principal office of the respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein granted; it being understood that the inspection, copying and photographing of the said documents shall be undertaken under the direct and strict supervision of this Commission. Provided, however, that other documents and/or papers not heretofore included are not covered by this Order and any inspection thereof shall require the prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries, allowances, bonuses, compensation and/or remuneration received by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-in- interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing his request to copy and inspect the management contract between

San Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof for the reason that he had already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production and inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent corporation in San Miguel International, Inc., until after the hearing on the merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for summary judgment, a temporary restraining order be issued, restraining respondents from holding the special stockholder's meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, respondents conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification of the special stockholders' meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's motion for production of record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent

Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission, on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated motion to strike and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4, 1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the meeting on March 20, 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

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

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or confirmation or from causing the

ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of respondent corporation, until further orders from this Court or until the Securities and Ex-change Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration, with its supplement, of the order of the Commission denying in part petitioner's motion for production of documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders' meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of respondent corporation but stating that he should not sit as such if elected, until such time that the Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of the order of respondent Commission denying petitioner's motion for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due process when it decided en banc an issue not raised before it and still pending before one of its Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging that the petition is without merit for the following reasons:

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

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

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

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic because respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has become moot and academic for the reason, among others that the acts of private respondent sought to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the order of respondent Commission, petitioner was allowed to run and be voted for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the questions and issues raised by petitioner are pending in the Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions for the determination of this Court because (1) the respondent Commission acted without circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took into consideration an urgent manifestation filed with the Commission by

petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the authority of the corporation as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express their wishes regarding disposition of corporate funds considering that their investments are the ones directly affected." It was alleged that the main petition has, therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due process, and "that all possible questions on the facts now pending before the respondent Commission are now before this Honorable Court which has the authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law.

I

Whether or not amended by-laws are valid is purely a legal question which public interest requires to be resolved —

It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to what the provisions are and evidence is not necessary to determine whether such amended by-laws are valid as framed and approved ... "; second: "it is for the interest and guidance of the public that an immediate and final ruling on the question be made ... "; third: "petitioner was denied due process by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation", citingGayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and the rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more importantly, by this Honorable Court, would have been for naught because the main question will come back to this

Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits "because public interest demands an early disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further proceedings, citing precedent where this Court, in similar situations resolved to decide the cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b) where public interest demand an early disposition of the case; or (c) where the trial court had already received all the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only a question of law is involved. 8a Because uniformity may be secured through review by a single Supreme Court, questions of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board", at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%Layer Pullets 33.0% 24.0% 57.0%Dressed Chicken 35.0% 14.0% 49.0%Poultry & Hog Feeds 40.0% 12.0% 52.0%Ice Cream 70.0% 13.0% 83.0%Instant Coffee 45.0% 40.0% 85.0% Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line

represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. 12 At common law, the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground that section 21 of the Corporation Law expressly gives the power to the

corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the next question that must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

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

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary position cannot serve himself first and his cestuis second. ... He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate

entity violate the ancient precept against serving two masters ... He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly though the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference or advantage of the fiduciary to the exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of them. A judge cannot be impartial if personally interested in the cause. No more can a director. Human nature is too weak -for this. Take whatever statute provision you please giving power to stockholders to choose directors, and in none will you find any express prohibition against a discretion to select directors having the company's interest at heart, and it would simply be going far to deny by mere implication the existence of such a salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director, the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or not the action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases. 23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid."24 This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not

empowered to add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." 27 In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

... A bank director has access to a great deal of information concerning the business and plans of a bank which would likely be injurious to the bank if known to another bank, and it was reasonable and prudent to enlarge this minimum disqualification to include any director, officer, employee, agent, nominee, or attorney of any other bank in California. The Ashkins case, supra, specifically recognizes protection against rivals and others who might acquire

information which might be used against the interests of the corporation as a legitimate object of by-law protection. With respect to attorneys or persons associated with a firm which is attorney for another bank, in addition to the direct conflict or potential conflict of interest, there is also the danger of inadvertent leakage of confidential information through casual office discussions or accessibility of files. Defendant's directors determined that its welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage of confidential information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any other firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious participation in the managerial functions of the company. As directors, it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing

corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision correccional in its minimum period or a fine ranging from two hundred to six thousand pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines, or any such merchandise or object of commerce manufactured, produced, processed, assembled in or imported into the Philippines, or of any article in the manufacture of which such manufactured, produced, processed, or imported merchandise or object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter in free markets. These laws

are designed to preserve free and unfettered competition as the rule of trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they operate to forestall concentration of economic power. 35 The law against monopolies and combinations in restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. 37 In short, it is the concentration of business in the hands of a few. The material consideration in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired. 38Further, it must be considered that the Idea of monopoly is now understood to include a condition produced by the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition by the qualification of interest or management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal situation. This is because an express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the same time as a director in any two or more corporations, if such corporations are, by virtue of their business and location of operation, competitors so that the elimination of competition between them would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or more competing corporations. A common director of two or more competing corporations would have access to confidential sales, pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director is that theinterlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations ... to the detriment of the small ones dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders, shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to practice price discrimination. CFC-Robina can segment the entire consuming population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to certain well established limitations. One of these is inherent in the very convert and definition of the terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of business, Identity of products and area of competition should be taken into consideration. It is, therefore, necessary to show that petitioner's business covers a substantial portion of the same markets for similar products to the extent of not less than 10% of respondent corporation's market for competing products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started

in 1948 with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a program for the setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be

required to be produced for examination, 60 and that a writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest."64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which were in corporation's possession and control in its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had Identical officers and directors.

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

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

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

40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds "in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provide that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a propose at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation the approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a supported failure to observe in its execution the. requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

12. G.R. No. 117847 October 7, 1998

PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs.COURT OF APPEALS and STEFANI SAÑO, respondents.

Contracts entered into by a corporate president without express prior board approval bind the corporation, when such officer's apparent authority is estabished and when these contracts are ratified by the corporation.

The Case

This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670.

In a collection case 1 filed by Stefani Saño against People's Aircargo and Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision 2 dated October 26, 1990, the dispositive portion of which reads: 3

WHEREFORE, in light of all the foregoing, Judgment is hereby rendered, ordering [petitioner] to pay [private respondent] the amount of sixty thousand (P60,000.00) pesos representing payment of [private respondents] services in preparing the manual of operations and in the conduct of a seminar for [petitioner]. The Counterclaim is hereby dismissed.

Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed to the Court of Appeals 4 (CA) which, in its Decision

promulgated February 28, 1994, granted his prayer for P400,000, as follows: 5

WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in that [petitioner] is ordered to pay [private respondent] the amount of four hundred thousand pesos (P400,000.00) representing payment of [private respondent's] services in preparing the manual of operations and in the conduct of a seminar for [petitioner].

As no new ground was raised by petitioner, reconsideration of the above-mentioned Decision was denied in the Resolution promulgated on October 28, 1994.

The Facts

Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a customs bonded warehouse at the old Manila International Airport in Pasay City. 6

To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation president, solicited a proposal from private respondent for the preparation of a feasibility study. 7 Private respondent submitted a letter-proposal dated October 17, 1986 ("First Contract" hereafter) to Punsalan, which is reproduced hereunder:8

Dear Mr. Punsalan:

With reference to your request for professional engineering consultancy services for your proposed MIA Warehousing Project may we offer the following outputs and the corresponding rate and terms of agreement:

=======================================

Project Feasibility Study consisting of

Market Study

Technical Study

Financial Feasibility Study

Preparation of pertinent documentation requirements for the application

_____________________________________________

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

=====================================================

Fifty percent (50%) upon confirmation of the agreement

Twenty-five percent (25%) 15 days after the confirmation of the agreement

Twenty-five percent (25%) upon submission of the specified outputs

The outputs will be completed and submitted within 30 days upon confirmation of the agreement and receipt by us of the first fifty percent payment.

---------------------------------------------------------------------------------

Thank you.

Yours truly, CONFORME:

(S)STEFANI C. SAÑO (S)ANTONIO C. PUNSALAN, JR.

(T)STEFANI C. SAÑO (T)ANTONIO C. PUNSALAN, JR.

Consultant for President, PAIRCARGO

Industrial Engineering

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondent's offer, as another company priced a similar proposal at only P15,000. 9 However, Punsalan preferred private respondent's service because of the latter's membership in the task force, which was supervising the transition of the Bureau of Customs from the Marcos government to the Aquino administration. 10

On October 17, 1986, pertitioner, through Punsalan, sent private respondent a letter, confirming their agreement as follows:

Dear Mr. Saño:

With regard to the services offered by your company in your letter dated 13 October 1986, for the preparation of the necessary study and documentations to support our Application for Authority to Operate a public Customs Bonded Warehouse located at the old MIA Compound in Pasay City, please be informed that our company is willing to hire your services and will pay the amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:

P100,000.00 — uppon signing of the agreement;

150,000.00 — on or before October 31, 1986, with the favorable Recommendation of the CBW on our application.

100,000.00 — upon receipt of the study in final form.

Very truly yours,(S)ANTONIO C. PUNSALAN

(T)ANTONIO C. PUNSALAN

President

CONFORME & RECEIVED from PAIRCARGO, the

amount of ONE HUNDRED THOUSAND PESOS

(P100,000.00), this 17th day of October, 1986

as 1st Installment payment of the service agreement

dated October 13, 1986.

(S)STEFANI C. SAÑO

(T)STEFANI C. SAÑO

Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid him the balance of the contract price, although not according to the schedule agreed upon. 11

On December 4, 1986, upon Punsalan's request, private respondent sent petitioner another letter-proposal ("Second Contract" hereafter), which reads:

People's Air Cargo & Warehousing Co., Inc.

Old MIA Compound, Metro Manila

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

President

Dear Mr. Pun[s]alan:

This is to formalize our proposal for consultancy services to your company the scope of which is defined in the attached service description.

The total service you have decided to avail . . . would be available upon signing of the conforme below and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00) payable at the schedule defined as follows (with the balance covered by post-dated cheques):

Downpayment upon signing conforme P80,000.00

15 January 1987 53,333.00

30 January 1987 53,333.00

15 February 1987 53,333.00

28 February 1987 53,333.00

15 March1987 53,333.00

30 March 1987 53,333.00

With is package, you are assured of the highest service quality as our performance record shows we always deliver no less.

Thank you very much.

Yours truly,

(S)STEFANI C. SAÑO

(T)STEFANI C. SAÑO

Industrial Engineering Consultant

CONFORME:

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.

During the trial, the lower court observed that the Second Contract bore, at the lower right portion of the letter, the following notations in pencil:

1. Operations Manual

2. Seminar/workshop for your employees

P400,000 — package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

The Manual has already been approved by the Commissioner but payment has not yet been made.

The lower left corner of the letter also contained the following notations:

1st letter — 4 Dec. 1986

2nd letter — 15 June 1987 with

"Hinanakit".

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations manual prepared by private respondent. 12 Petitioner submitted said operations manual to the Bureau of Customs is connection with the former's application to operate a bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license to operate, enabling it to become one of the three public bonded warehouses at the international airport. 13 Private respondent also conducted, in the third week of January 1987 in the warehouse of petitioner, a three-day training seminar for the latter's employees. 14

On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then Commissioner Alex Padilla, a position he held until he became technical assitant to then Commissioner Miriam Defensor-Santiago on March 7, 1988. 15 Meanwhile, Punsalan sold his shares in petitioner-corporation and resigned as its president in 1987.16

On February 9, 1988, private respondent filed a collection suit against petitioner. He allege that he had prepared an operations manual for petitioner, conducted a seminar-workshop for its employees and delivered to it a computer program; but that, despite demand, petitioner refused to pay him for his services.

Petitioner, in its answer, denied that private respondent had prepared an operations manual and a computer program or conducted a seminar-workshop for its employees. It further alleged that the letter-agreement was signed by Punsalan without authority, "in collusion with [private respondent] in order to unlawfully get some money from [petitioner]," and despite his knowledge that a group of employees of the company had been commissioned by the board of directors to prepare an operations manual. 17

The trial court declared the Second Contract unenforceable or simulated. However, since private respondent had actually prepared the operations manual and conducted a training seminar for petitioner and its employees, the trial court awarded P60,000 to the former, on the ground that no one should be unjustly enriched at the expense of another (Article 2142, Civil Code). The trial court determined the amount "in light of the evidence presented by defendant on the usual charges made by a leading consultancy firm on similar services." 18

The Ruling of the Court of Appeals

To Respondent Court, the pivotal issue of private respondent's appeal was the enforceability of the Second Contract. It noted that petitioner did not appeal the Decision of the trial court, implying that it had agreed to pay the P60,000 award. If the contract was valid and enforceable, then petitioner should be held liable for the full amount stated therein, not P60,000 as held by the lower court.

Rejecting the finding of the trial court that the December 4, 1986 contract was simulated or unenforceable, the CA ruled in favor of its validity and enforceability. According to the Court of Appeals, the evidence on record shows that the president of petititoner-corporation had entered into the First Contract, which was similar to the Second Contract. Thus, petitioner had clothed its president with apparent authority to enter into the disputed agreement. As it had also become the practice of the petitioner-corporation to allow its president to negotiate and execute contracts necessary to secure its license as a customs bonded warehouse without prior board approval, the board itself, by its acts and through acquiescence, practically laid aside the normal requirement of prior express approval. The Second Contract was declared valid and binding on the petitioner, which was held liable to private respondent in the full amount of P400,000.

Disagreeing with the CA, petitioner lodged this petition before us. 19

The Issues

Instead of alleging reversible errors, petitioner imputes "grave abuse of discretion" to the Court of Appeals, viz.: 20

I. . . . [I]n ruling that the subject letter-agreement for services was binding on the corporation simply because it was entered into by its president[;]

II. . . . [I]n ruling that the subject letter-agreement for services was binding on the corporation notwithstanding the lack of any board authority since it was the purported "practice" to allow the president to enter into contracts of said nature (citing one previous instance of a similar contract)[;] and

III. . . . [I]n ruling that the subject letter-agreement for services was a valid contract and not merely simulated.

The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its ground for seeking reversal of the assailed Decision. Although the Rules of Court specify "reversible errors" as grounds for a petition for review under Rule 45, the Court will lay aside for the nonce this procedural lapse and consider the allegations of "grave abuse" as statements of reversible errors of law.

Petitioner does not contest its liability; it merely disputes the amount of such accountability. Hence, the resolution of this petition rests on the sole issue of the enforceability and validity of the Second Contract, more specifically: (1) whether the president of the petitioner-corporation had apparent authority to bind petitioner to the Second Contract; and (2) whether the said contract was valid and not merely simulated.

The Court's Ruling

The petition is not meritorious.

First Issue:

Apparent Authority of a Corporate President

Petitioner argues that the disputed contract is unenforceable, because Punsalan, its president, was not authorized by its board of directors to enter into said contract.

The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. 21 A corporation is a juridical person, separate and distinct from its stockholders and members, "having . . . powers, attributes and properties expressly authorized by law or incident to its existence." 22

Being a juridical entity, a corporation may board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management, 23 as provided in Section 23 of the Corporation Code of the Philippines:

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees . . . .

Under this provision, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporaration, bylaws, or

relevant provisions of law. 24 Howeever, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: 25

A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.

Accordingly, the appellate court ruled in this case that the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was in fact exercised without any objection from its board or shareholders. Petitioner had previously allowed its president to enter into the First Contract with private respondent without a board resolution expressly authorizing him; thus, it had clothed its president with apparent authority to execute the subject contract.

Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract does not constitute corporate practice, which Webster defines as "frequent or custmary action." It cites Board of Liquidators v. Kalaw,26 in which the practice of NACOCO allowing its general manager to negotiate and execute contract in its copra trading activities for and on its behalf, without prior board approval, was inferred from sixty contract — not one, as in present case — previously entered into by the corporation without such board resolution.

Petitioner's argument is not persuasive. Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. 27 It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. 28 It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporale officer with the power to bind the corporation.

In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to or repudiate said contract, thus "clothing" its president with the power to bind the corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong — senior vice president, treasurer and major stockholder of petitioner. Testifying on the First Contract, he said: 29

A: Mr. [Punsalan] told me that he prefer[s] Mr. Saño because Mr. Saño is very influential with the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to approve our project study and I objected to that, sir. And I said it [was an exorbitant] price. And Mr. Punsalan he is the [p]resident, so he [gets] his way.

Q: And so did the company eventually pay this P350,000.00 to Mr. Saño?

A: Yes, sir.

The First Contract was consummated, implemented and paid without a hitch.

Hence, private respondent should not be faulted for believing that Punsalan's conformity to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority. 30

Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo then that the Second Contract was outside the usual powers of the president, petitioner's ratification of said contract and acceptance of benefits have made it binding, nonetheless. The enforceability of contracts under Article 1403(2) is ratified "by the acceptance of benefits under them" under Article 1405.

Inasmuch as a corporate president is often given general supervision and control over corporate operations, the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the realization that such officer has certain limited powers in the transaction of the usual and ordinary business of the corporation. 31 In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties. 32

Hence, it has been held in other jurisdictions that the president of a corporation possesses the power to enter into a contract for the corporation, when the "conduct on the part of both the president and the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company and that the company had authorized him so to act and had recognized, approved and ratified his former and similar actions." 33 Furthermore, a party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy. 34

Second Issue:Alleged Simulation of the First Contract

As an alternative position, petitioner seeks to pare down its liabilities by limiting its exposure from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner capitalizes on the "badges of fraud" cited by the trial court in declaring said contract either simulated or unenforceable, viz.:

. . . The October 1986 transaction with [private respondent] involved P350,000. The same was embodied in a letter which bore therein not only the conformity of [petitioner's] then President Punsalan but also drew a letter-confirmation from the latter for, indeed, he was clothed with authority to enter into the

contract after the same was brought to the attention and consideration of [petitioner]. Not only that, a [down payment] was made. In the alleged agreement of December 4, 1986 subject of the present case, the amount is even bigger - P400,000.00. Yet, the alleged letter-agreement drew no letter of confirmation. And no [down payment] and postdated checks were given. Until the filing of the present case in February 1988, no written demand for payment was sent to [petitioner]. [Private respondent's] claim that he sent one in writing, and one was sent by his counsel who manifested that "[h]e was looking for a copy in [his] files" fails in light of his failure to present any such copy. These and the following considerations, to wit:

1) Despite the fact that no [down payment] and/or postdated checks [partial payments] (as purportedly stipulated in the alleged contract) [was given, private respondent] went ahead with the services[;]

2) [There was a delay in the filing of the present suit, more than a year after [private respondent] allegedly completed his services or eight months after the alleged last verbal demand for payment made on Punsalan in June 1987;

3) Does not Punsalan's writing allegedly in June 1987 on the alleged letter-agreement of "your employees[,]" when it should have been "our employees", as he was then still connected with [petitioner], indicate that the letter-agreement was signed by Punsalan when he was no longer connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioner's] authority and must have been done "in collusion with plaintiff in order to unlawfully get some money from [petitioner]?

4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing thereon his conformity, how come . . . when Punsalan allegedly visited [private respondent] in his office at the Bureau of Customs, in June 1987, Punsalan "brought" (again?) the letter (with the pencil [notation] at the left bottom portion allegedly already written)?

5) How come . . . [private respondent] did not even keep a copy of the alleged service contract allegedly attached to the letter-agreement?

6) Was not the letter-agreement a mere draft, it bearing the corrections made by Punsalan of his name (the letter "n" is inserted before the last letter "o" in Antonio) and of the spelling of his family name (Punsalan, not Punzalan)?

7) Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual examinanon in a petition for review under Rule 45 of the Rules of Court. 35 This rule, however, admits of exceptions, one of which is a conflict between the factual findings of the lower and of the appellate courts 36 as in the case at bar.

After judicious deliberation, the Court agrees with the appellate court that the alleged "badges of fraud" mentioned earlier have not affected in any manner the perfection thereof. First, the lack of payment (whether down, partial or full payment), even after completion of private respondent's obligations, imports only a defect in the performance of the contract on the part of petitioner. Second, the delay in the filing of action was not fatal to private respondent's cause. Despite the lapse of one year after private respondent completed his services or eight months after the alleged last demand for payment in June 1987, the action was still filed within the allowable period, considering that an action based on a written contract prescribes only after ten years from the time the right of action accrues. 37 Third, a misspelling in the contract does not establish vitiation of consent, cause or object of the contract. Fourth, a confirmation letter is not an essential element of a contract, neither is it necessary to perfect one. Fifth, private respondent's failure to implead the corporate president does not establish collusion between them. Petitioner could have easily filed a third-party claim against Punsalan if it believed that it had recourse against the latter. Lastly, the mere fact that the contract price was six times the alleged going rate does not invalidate it. 38 In short, these "badges" do not establish simulation of said contract.

A fictitious and simulated agreement lacks consent which is essential to a valid and enforceable contract. 39 A contract is simulated if the parties do not intend to be bound at all (absolutely simulated), 40 or if the parties conceal their true agreement (relatively simulated). 41 In the case at bar, petitioner received from private respondent a letter-offer containing the terms of the former, including a stipulation of the consideration for the latter's services. Punsalan's conformity, as well as the receipt and use of the operations manual, shows petitioner's consent to or, at the very least, ratification of the contract. To repeat, petitioner even submitted the manual to the Bureau of Customs and allowed private respondent to conduct the seminar for its employees. Private respondent heard no objection from the petitioner, until he claimed payment for the services he had rendered.

Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting parties. 42 The circumstances outlined above do not establish any intention to simulate the contract in dispute. On the contrary, the legal presumption is always on the validity of contracts. A corporation, by accepting benefits of a transaction entered into without authority, has ratified the agreement and is, therefore, bound by it. 43

WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

13. [G.R. No. 111448. January 16, 2002]

AF REALTY & DEVELOPMENT, INC. and ZENAIDA R. RANULLO, petitioners, vs. DIESELMAN FREIGHT SERVICES, CO., MANUEL C. CRUZ, JR. and MIDAS DEVELOPMENT CORPORATION, respondents.

Petition for review on certiorari assailing the Decision dated December 10, 1992 and the Resolution (Amending Decision) dated August 5, 1993 of the Court of Appeals in CA-G.R. CV No. 30133.

Dieselman Freight Service Co. (Dieselman for brevity) is a domestic corporation and a registered owner of a parcel of commercial lot consisting of 2,094 square meters, located at 104 E. Rodriguez Avenue, Barrio Ugong, Pasig City, Metro Manila. The property is covered by Transfer Certificate of Title No. 39849 issued by the Registry of Deeds of the Province of Rizal.[1]

On May 10, 1988, Manuel C. Cruz, Jr., a member of the board of directors of Dieselman, issued a letter denominated as "Authority To Sell Real Estate"[2] to Cristeta N. Polintan, a real estate broker of the CNP Real Estate Brokerage. Cruz, Jr. authorized Polintan "to look for a buyer/buyers and negotiate the sale" of the lot at P3,000.00 per square meter, or a total of P6,282,000.00. Cruz, Jr. has no written authority from Dieselman to sell the lot.

In turn, Cristeta Polintan, through a letter[3] dated May 19, 1988, authorized Felicisima ("Mimi") Noble[4] to sell the same lot.

Felicisima Noble then offered for sale the property to AF Realty & Development, Inc. (AF Realty) at P2,500.00 per square meter. [5] Zenaida Ranullo, board member and vice-president of AF Realty, accepted the offer and issued a check in the amount of P300,000.00 payable to the order of Dieselman. Polintan received the check and signed an "Acknowledgement Receipt"[6]indicating that the amount of P300,000.00 represents the partial payment of the property but refundable within two weeks should AF Realty disapprove Ranullo's action on the matter.

On June 29, 1988, AF Realty confirmed its intention to buy the lot. Hence, Ranullo asked Polintan for the board resolution of Dieselman authorizing the sale of the property. However, Polintan could only give Ranullo the original copy of TCT No. 39849, the tax declaration and tax receipt for the lot, and a photocopy of the Articles of Incorporation of Dieselman.[7]

On August 2, 1988, Manuel F. Cruz, Sr., president of Dieselman, acknowledged receipt of the said P300,000.00 as "earnest money" but required AF Realty to finalize the sale at P4,000.00per square meter.[8] AF Realty replied that it has paid an initial down payment of P300,000.00 and is willing to pay the balance.[9]

However, on August 13, 1988, Mr. Cruz, Sr. terminated the offer and demanded from AF Realty the return of the title of the lot earlier delivered by Polintan.[10]

Claiming that there was a perfected contract of sale between them, AF Realty filed with the Regional Trial Court, Branch 160, Pasig City a complaint for specific performance (Civil Case No. 56278) against Dieselman and Cruz, Jr.. The complaint prays that Dieselman be ordered to execute and deliver a final deed of sale in favor of AF Realty. [11] In its amended complaint,[12] AF Realty asked for payment of P1,500,000.00 as compensatory damages; P400,000.00 as attorney’s fees; and P500,000.00 as exemplary damages.

In its answer, Dieselman alleged that there was no meeting of the minds between the parties in the sale of the property and that it did not authorize any person to enter into such transaction on its behalf.

Meanwhile, on July 30, 1988, Dieselman and Midas Development Corporation (Midas) executed a Deed of Absolute Sale[13] of the same property. The agreed price was P2,800.00 per square meter. Midas delivered to Dieselman P500,000.00 as down payment and deposited the balance of P5,300,000.00 in escrow account with the PCIBank.

Constrained to protect its interest in the property, Midas filed on April 3, 1989 a Motion for Leave to Intervene in Civil Case No. 56278. Midas alleged that it has purchased the property and took possession thereof, hence Dieselman cannot be compelled to sell and convey it to AF Realty. The trial court granted Midas' motion.

After trial, the lower court rendered the challenged Decision holding that the acts of Cruz, Jr. bound Dieselman in the sale of the lot to AF Realty.[14] Consequently, the perfected contract of sale between Dieselman and AF Realty bars Midas' intervention. The trial court also held that Midas acted in bad faith when it initially paid Dieselman P500,000.00 even without seeing the latter's title to the property. Moreover, the notarial report of

the sale was not submitted to the Clerk of Court of the Quezon City RTC and the balance of P5,300,000.00 purportedly deposited in escrow by Midas with a bank was not established.

The dispositive portion of the trial court’s Decision reads:

“WHEREFORE, foregoing considered, judgment is hereby rendered ordering defendant to execute and deliver to plaintiffs the final deed of sale of the property covered by the Transfer Certificate of Title No. 39849 of the Registry of Deed of Rizal, Metro Manila District II, including the improvements thereon, and ordering defendants to pay plaintiffs attorney’s fees in the amount of P50,000.00 and to pay the costs.

"The counterclaim of defendants is necessarily dismissed.

"The counterclaim and/or the complaint in intervention are likewise dismissed

"SO ORDERED.”[15]

Dissatisfied, all the parties appealed to the Court of Appeals.

AF Realty alleged that the trial court erred in not holding Dieselman liable for moral, compensatory and exemplary damages, and in dismissing its counterclaim against Midas.

Upon the other hand, Dieselman and Midas claimed that the trial court erred in finding that a contract of sale between Dieselman and AF Realty was perfected. Midas further averred that there was no bad faith on its part when it purchased the lot from Dieselman.

In its Decision dated December 10, 1992, the Court of Appeals reversed the judgment of the trial court holding that since Cruz, Jr. was not authorized in writing by Dieselman to sell the subject property to AF Realty, the sale was not perfected; and that the Deed of Absolute Sale between Dieselman and Midas is valid, there being no bad faith on the part of the latter. The Court of Appeals then declared Dieselman and Cruz, Jr. jointly and severally liable to AF Realty for P100,000.00 as moral damages; P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.[16]

On August 5, 1993, the Court of Appeals, upon motions for reconsideration filed by the parties, promulgated an Amending Decision, the dispositive portion of which reads:

“WHEREFORE, The Decision promulgated on October 10, 1992, is hereby AMENDED in the sense that only defendant Mr. Manuel Cruz, Jr. should be made liable to pay the plaintiffs the damages and attorney’s fees awarded therein, plus the amount of P300,000.00 unless, in the case of the said P300,000.00, the same is still deposited with the Court which should be restituted to plaintiffs.

"SO ORDERED.”[17]

AF Realty now comes to this Court via the instant petition alleging that the Court of Appeals committed errors of law.

The focal issue for consideration by this Court is who between petitioner AF Realty and respondent Midas has a right over the subject lot.

The Court of Appeals, in reversing the judgment of the trial court, made the following ratiocination:

“From the foregoing scenario, the fact that the board of directors of Dieselman never authorized, verbally and in writing, Cruz, Jr. to sell the

property in question or to look for buyers and negotiate the sale of the subject property is undeniable.

"While Cristeta Polintan was actually authorized by Cruz, Jr. to look for buyers and negotiate the sale of the subject property, it should be noted that Cruz, Jr. could not confer on Polintan any authority which he himself did not have. Nemo dat quod non habet. In the same manner, Felicisima Noble could not have possessed authority broader in scope, being a mere extension of Polintan’s purported authority, for it is a legal truism in our jurisdiction that a spring cannot rise higher than its source. Succinctly stated, the alleged sale of the subject property was effected through persons who were absolutely without any authority whatsoever from Dieselman.

"The argument that Dieselman ratified the contract by accepting the P300,000.00 as partial payment of the purchase price of the subject property is equally untenable. The sale of land through an agent without any written authority is void.

x x x x x x x x x

"On the contrary, anent the sale of the subject property by Dieselman to intervenor Midas, the records bear out that Midas purchased the same from Dieselman on 30 July 1988. The notice of lis pendens was subsequently annotated on the title of the property by plaintiffs on 15 August 1988. However, this subsequent annotation of the notice of lis pendens certainly operated prospectively and did not retroact to make the previous sale of the property to Midas a conveyance in bad faith. A subsequently registered notice of lis pendens surely is not proof of bad faith. It must therefore be borne in mind that the 30 July 1988 deed of sale between Midas and Dieselman is a document duly certified by notary public under his hand and seal. x x x. Such a deed of sale being public document acknowledged before a notary public is admissible as to the date and fact of its execution without further proof of its due execution and delivery (Bael vs. Intermediate Appellate Court, 169 SCRA617; Joson vs. Baltazar, 194 SCRA 114) and to prove the defects and lack of consent in the execution thereof, the evidence must be strong and not merely preponderant x x x.”[18]

We agree with the Court of Appeals.

Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it.[19] Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board.[20] Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are held not binding on the corporation.[21]

In the instant case, it is undisputed that respondent Cruz, Jr. has no written authority from the board of directors of respondent Dieselman to sell or to negotiate the sale of the lot, much less to appoint other persons for the same purpose. Respondent Cruz, Jr.’s lack of such authority precludes him from conferring any authority to Polintan involving the subject realty. Necessarily, neither could Polintan authorize Felicisima Noble. Clearly, the collective acts of respondent Cruz, Jr., Polintan and Noble cannot bind Dieselman in the purported contract of sale.

Petitioner AF Realty maintains that the sale of land by an unauthorized agent may be ratified where, as here, there is acceptance of

the benefits involved. In this case the receipt by respondent Cruz, Jr. from AF Realty of the P300,000.00 as partial payment of the lot effectively binds respondent Dieselman.[22]

We are not persuaded.

Involved in this case is a sale of land through an agent. Thus, the law on agency under the Civil Code takes precedence. This is well stressed in Yao Ka Sin Trading vs. Court of Appeals:[23]

“Since a corporation, such as the private respondent, can act only through its officers and agents, all acts within the powers of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents when once appointed, or members acting in their stead, are subject to the same rules, liabilities, and incapacities as are agents of individuals and private persons.” (Emphasis supplied)

Pertinently, Article 1874 of the same Code provides:

“ART. 1874. When a sale of 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.” (Emphasis supplied)

Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo were not authorized by respondent Dieselman to sell its lot, the supposed contract is void. Being a void contract, it is not susceptible of ratification by clear mandate of Article 1409 of the Civil Code, thus:

“ART. 1409. The following contracts are inexistent and void from the very beginning:

x x x

(7) Those expressly prohibited or declared void by law.

“These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.” (Emphasis supplied)

Upon the other hand, the validity of the sale of the subject lot to respondent Midas is unquestionable. As aptly noted by the Court of Appeals,[24] the sale was authorized by a board resolution of respondent Dieselman dated May 27, 1988.

The Court of Appeals awarded attorney's fees and moral and exemplary damages in favor of petitioner AF Realty and against respondent Cruz, Jr.. The award was made by reason of a breach of contract imputable to respondent Cruz, Jr. for having acted in bad faith. We are no persuaded. It bears stressing that petitioner Zenaida Ranullo, board member and vice-president of petitioner AF Realty who accepted the offer to sell the property, admitted in her testimony[25] that a board resolution from respondent Dieselman authorizing the sale is necessary to bind the latter in the transaction; and that respondent Cruz, Jr. has no such written authority. In fact, despite demand, such written authority was not presented to her.[26] This notwithstanding, petitioner Ranullo tendered a partial payment for the unauthorized transaction. Clearly, respondent Cruz, Jr. should not be held liable for damages and attorney's fees.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby AFFIRMED with MODIFICATION in the sense that the award of damages and attorney's fees is deleted. Respondent Dieselman is

ordered to return to petitioner AF Realty its partial payment of P300,000.00. Costs against petitioners.

SO ORDERED.

14. [G.R. No. 109491. February 28, 2001]

ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents.

What is before the Court are separate appeals from the decision of the Court of Appeals,[1] ruling that Hi-Cement Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon,[2] treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason “payment stopped”. Atrium, thus, instituted this action after its demand for payment of the value of the checks was denied.[3]

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney’s fees.[4]

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.[5]

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum products.[6]

Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan which the subject checks would secure as collateral.[7]

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion of which reads:

“WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by preponderance of evidence, judgment is

hereby rendered ordering all the defendants except defendant Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorney’s fees and the cost of suit.”

All other claims are, for lack of merit dismissed.

SO ORDERED.”[8]

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.[9]

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.[10]

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not authorize the issuance of the checks, it could still be held liable for the checks. And assuming that the checks were issued with its authorization, the same was without any consideration, which is a defense against a holder in due course and that the liability shall be borne alone by E.T. Henry.[11]

On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court, the dispositive portion of which reads:

“Judgement is hereby rendered:

(1) dismissing the plaintiff’s complaint as against defendants Hi-Cement Corporation and Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for attorney’s fees.

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorney’s fees.

With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes Victoria M. de Leon.

So ordered.”[12]

Hence, the recourse to this Court.[13]

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it to pay P20,000.00 as attorney’s fees.[14]

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks issued to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the checks was personally liable for the value of the checks, which were declared to be issued without consideration;

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney’s fees and costs.[15]

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry engaged in a “kiting operation” to raise funds for E.T. Henry, who admittedly was in need of financial assistance. The Court finds that there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not anultra vires act.

“An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law” [16] The term “ultra vires”is “distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.”[17]

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally liable for the checks issued as corporate officers and authorized signatories of the check.

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:

“1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

“2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

“3. He agrees to hold himself personally and solidarily liable with the corporation; or

“4. He is made, by a specific provision of law, to personally answer for his corporate action.”[18]

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee’s account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, “that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry”. Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor.

The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:

“A holder in due course is a holder who has taken the instrument under the following conditions:

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

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

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

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

In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee’s account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee’s account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course.

However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument.[19]

The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable.[20] One such defense is absence or failure of consideration.[21] We need not rule on the other issues raised, as they merely follow as a consequence of the foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.

No costs.

SO ORDERED.

15. [G.R. No. 131214. July 27, 2000]

BA SAVINGS BANK, petitioner, vs. ROGER T. SIA, TACIANA U. SIA and JOHN DOE, respondents.

The certificate of non-forum shopping required by Supreme Court Circular 28-91 may be signed, for and on behalf of a corporation, by a specifically authorized lawyer who has personal knowledge of the facts required to be disclosed in such document. Unlike natural persons,

corporations may perform physical actions only through properly delegated individuals; namely, its officers and/or agents.

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the August 6, 1997 Resolution[1] of the Court of Appeals (CA) in CA-GR SP No. 43209.[2]

Also challenged by petitioner is the October 24, 1997 CA Resolution[3] denying its Motion for Reconsideration.

The Facts

On August 6, 1997, the Court of Appeals issued a Resolution denying due course to a Petition for Certiorari filed by BA Savings Bank, on the ground that “the Certification on anti-forum shopping incorporated in the petition was signed not by the duly authorized representative of the petitioner, as required under Supreme Court Circular No. 28-91, but by its counsel, in contravention of said circular x x x.”

A Motion for Reconsideration was subsequently filed by the petitioner, attached to which was a BA Savings Bank Corporate Secretary’s Certificate,[4] dated August 14, 1997. The Certificate showed that the petitioner’s Board of Directors approved a Resolution on May 21, 1996, authorizing the petitioner’s lawyers to represent it in any action or proceeding before any court, tribunal or agency; and to sign, execute and deliver the Certificate of Non-forum Shopping, among others.

On October 24, 1997, the Motion for Reconsideration was denied by the Court of Appeals on the ground that Supreme Court Revised Circular No. 28-91 “requires that it is the petitioner, not the counsel, who must certify under oath to all of the facts and undertakings required therein.”

Hence, this appeal.[5]

Issue

In its Memorandum, petitioner submits the following issues for the consideration of the Court:

“I Whether or not petitioner-corporation’s lawyers are authorized to execute and sign the certificate of non-forum shopping. x x x

“II Whether or not the certification of petitioner’s authorized lawyers will bind the corporation.

“III Whether or not the certification by petitioner corporation’s lawyers is in compliance with the requirements on non-forum shopping.”[6]

Simply stated, the main issue is whether Supreme Court Revised Circular No. 28-91 allows a corporation to authorize its counsel to execute a certificate of non-forum shopping for and on its behalf.

The Court’s Ruling

The Petition is meritorious.

Main Issue:

Authority of Counsel

A corporation, such as the petitioner, has no powers except those expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board of directors. “All acts within the powers of a corporation may be performed by agents of its selection; and, except so far as limitations or restrictions which may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons.”[7]

In the present case, the corporation’s board of directors issued a Resolution specifically authorizing its lawyers “to act as their agents in any action or proceeding before the Supreme Court, the Court of Appeals, or any other tribunal or agency[;] and to sign, execute and deliver in connection therewith the necessary pleadings, motions, verification, affidavit of merit, certificate of non-forum shopping and other instruments necessary for such action and proceeding.” The Resolution was sufficient to vest such persons with the authority to bind the corporation and was specific enough as to the acts they were empowered to do.

In the case of natural persons, Circular 28-91 requires the parties themselves to sign the certificate of non-forum shopping. However, such requirement cannot be imposed on artificial persons, like corporations, for the simple reason that they cannot personally do the task themselves. As already stated, corporations act only through their officers and duly authorized agents. In fact, physical actions, like the signing and the delivery of documents, may be performed, on behalf of the corporate entity, only by specifically authorized individuals.

It is noteworthy that the Circular does not require corporate officers to sign the certificate. More important, there is no prohibition against authorizing agents to do so.

In fact, not only was BA Savings Bank authorized to name an agent to sign the certificate; it also exercised its appointing authority reasonably well. For who else knows of the circumstances required in the Certificate but its own retained counsel. Its regular officers, like its board chairman and president, may not even know the details required therein.

Consistent with this rationale, the Court en banc in Robern Development Corporation v. Judge Jesus Quitain[8] has allowed even an acting regional counsel of the National Power Corporation to sign, among others, the certificate of non-forum shopping required by Circular 28-91. The Court held that the counsel was “in the best position to verify the truthfulness and the correctness of the allegations in the Complaint” and “to know and to certify if an action x x x had already been filed and pending with the courts.”[9]

Circular 28-91 was prescribed by the Supreme Court to prohibit and penalize the evils of forum shopping. We see no circumvention of this rationale if the certificate was signed by the corporation’s specifically authorized counsel, who had personal knowledge of the matters required in the Circular. In Bernardo v. NLRC,[10] we explained that a literal interpretation of the Circular should be avoided if doing so would subvert its very rationale. Said the Court:

“x x x. Indeed, while the requirement as to certificate of non-forum shopping is mandatory, nonetheless the requirements must not be interpreted too literally and thus defeat the objective of preventing the undesirable practice of forum-shopping.”

Finally, we stress that technical rules of procedure should be used to promote, not frustrate, justice.[11] While the swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal.

WHEREFORE, the Petition is GRANTED and the appealed Resolution is REVERSED and SET ASIDE. The case is REMANDED to the Court of Appeals, which is directed to continue the proceedings in CA-GR SP No. 43209 with all deliberate speed. No costs.

SO ORDERED.

16. [G.R. No. 150978. April 3, 2003]

POWTON CONGLOMERATE[1], INC., and PHILIP C. CHIEN, petitioners, vs. JOHNNY AGCOLICOL, respondent.

In a contract to build a structure or any other work for a stipulated price, the contractor cannot demand an increase in the contract price on account of higher cost of labor or materials, unless there has been a change in the plan and specification which was authorized in writing by the other party and the price has been agreed upon in writing by both parties.[2]

This is a petition for review on certiorari assailing the September 3, 2001 Decision[3] of the Court of Appeals in CA-G.R. CV No. 65100, and its December 5, 2001 Resolution[4] denying petitioner’s motion for reconsideration.

Sometime in November 1990, respondent Johnny Agcolicol, proprietor of Japerson Engineering, entered into an “Electrical Installation Contract” with Powton Conglomerate, Inc. (Powton), thru its President and Chairman of the Board, Philip C. Chien. For a contract price of P5,300,000.00, respondent undertook to provide electrical works as well as the necessary labor and materials for the installation of electrical facilities at the Ciano Plaza Building owned by Powton, located along M. Reyes Street, corner G. Mascardo Street, Bangkal, Makati, Metro Manila. [5] In August 1992, the City Engineer’s Office of Makati inspected the electrical installations at the Ciano Plaza Building and certified that the same were in good condition. Hence, it issued the corresponding certificate of electrical inspection.

On December 16, 1994, respondent filed with the Regional Trial Court of Pasay City, Branch 115, the instant complaint for sum of money against the petitioners.[6] He alleged that despite the completion of the electrical works at Ciano Plaza Building, the latter only paid the amount of P5,031,860.40, which is equivalent to more than 95% of the total contract price, thereby leaving a balance of P268,139.80. Respondent likewise claimed the amount of P722,730.38 as additional electrical works which were necessitated by the alleged revisions in the structural design of the building.[7]

In their answer, petitioners contended that they cannot be obliged to pay the balance of the contract price because the electrical installations were defective and were completed beyond the agreed period.[8] During the trial, petitioner Chien testified that they should not be held liable for the additional electrical works allegedly performed by the petitioner because they never authorized the same.[9]

At the pre-trial conference, the parties stipulated, inter alia, that the unpaid balance claimed by the respondent is P268,139.60 and the cost of additional work is P722,730.38.[10]

On August 16, 1999, a decision was rendered awarding the respondent the total award of P990,867.38 representing the unpaid balance and the costs of additional works. The dispositive portion thereof reads:

Wherefore, this Court renders its judgment in favor of the plaintiff and orders the defendants Powton Congolmerate and Philip C. Chien to pay the plaintiff, jointly and severally, the amount of P990,867.38 representing their total unpaid obligations plus legal interest from the time of the filing of this complaint. No pronouncement as to costs.

SO ORDERED.[11]

Aggrieved, petitioners appealed to the Court of Appeals which, however, affirmed the decision of the trial court.[12] The motion for reconsideration was likewise denied.[13]

Hence, the instant petition.

Is the petitioner liable to pay the balance of the contract price and the increase in costs brought about by the revision of the structural design of the Ciano Plaza Building?

The petition is partly meritorious.

We agree with the findings of both the trial court and the Court of Appeals that petitioners failed to show that the installations made by respondent were defective and completed beyond the agreed period. The justification cited by petitioners for not paying the balance of the contract price is the self-serving allegation of petitioner Chien. Pertinent portion of his testimony, reads:

COURT:

Q: You are telling the Court that you did not accept the job because it is not yet complete. That is [a] general statement.

ATTY. FLORENCIO:

Q: Why did you say that the job was not yet complete?

COURT: Specify.

WITNESS:

A: I am not an electrical engineer but my men…we also get independent engineer to certify that the job was not complete, your Honor.

COURT:

Q: You mean to say you hired an independent electrical engineer and he certified that the job is not yet complete and there is danger?

WITNESS:

A: Yes, your Honor.

COURT:

Q: You have to present that engineer.

ATTY. FLORENCIO:

A: Yes, your Honor.[14]

Notwithstanding the above promise, petitioners never presented the engineer or any other competent witness to testify on the matter of delay and defects. Having failed to present sufficient proof, petitioners’ bare assertion of unsatisfactory and delayed installation will not justify their non-payment of the balance of the contract price. Hence, we affirm the ruling of the trial court and the Court of Appeals ordering petitioners to pay the balance of P268,139.80.

In awarding additional costs to respondent, both the trial court and the Court of Appeals sweepingly applied the principle of unjust enrichment without discussing the relevance in the instant case of Article 1724 of the Civil Code, which provides:

Art. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the landowner, can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided:

(1) Such change has been authorized by the proprietor in writing; and

(2) The additional price to be paid to the contractor has been determined in writing by both parties.

Article 1724 of the Civil Code was copied from Article 1593 of the Spanish Civil Code,[15] which provided as follows:

No architect or contractor who, for a lump sum, undertakes the construction of a building, or any other work to be done in accordance with a plan agreed upon with the owner of the ground, may demand an increase of the price, even if the costs of the materials or labor has increased; but he may do so when any change increasing the work is made in the plans, provided the owner has given his consent thereto.[16]

The present Civil Code added substantive requisites before recovery of the contractor may be validly had. It will be noted that while under the precursor provision, recovery for additional costs may be allowed if consent to make such additions can be proved, the present provision clearly requires that the changes should be authorized, such authorization by the proprietor in writing. The evident purpose of the amendment is to prevent litigation for additional costs incurred by reason of additions or changes in the original plan. Undoubtedly, it was adopted to serve as a safeguard or a substantive condition precedent to recovery.[17]

In Weldon Construction Corporation v. Court of Appeals,[18] involving a contract of supervision of construction of a theater, we denied the contractor’s claim to recover costs for additional works. It was held that the contract entered into by the parties was one for a piece of work for a stipulated price, wherein the right of the contractor to recover the cost of additional works is governed by Article 1724 of the Civil Code. Thus –

In addition to the owner's authorization for any change in the plans and specifications, Article 1724 requires that the additional price to be paid for the contractor be likewise reduced in writing. Compliance with the two requisites in Article 1724, a specific provision governing additional works, is a condition precedent to recovery (San Diego v. Sayson, supra.). The absence of one or the other bars the recovery of additional costs. Neither the authority for the changes made nor the additional price to be paid therefor may be proved by any other evidence for purposes of recovery.

In the case before this Court, the records do not yield any written authority for the changes made on the plans and specifications of the Gay Theater

building. Neither can there be found any written agreement on the additional price to be paid for said "extra works." While the trial court may have found in the instant case that the private respondent admitted his having requested the "extra works" done by the contractor (Record on Appeal, p. 66 [C.F.I. Decision]), this does not save the day for the petitioner. The private respondent claims that the contractor agreed to make the additions without additional cost. Expectedly, the petitioner vigorously denies said claim of the private respondent. This is precisely a misunderstanding between parties to a construction agreement which the lawmakers sought to avoid in prescribing the two requisites under Article 1724 (Report of the Code Commission, p. 148). And this case is a perfect example of a tedious litigation which had ensued between the parties as a result of such misunderstanding. Again, this is what the law endeavors to prevent (San Diego v. Sayson, supra.)

In the absence of a written authority by the owner for the changes in the plans and specifications of the building and of a written agreement between the parties on the additional price to be paid to the contractor, as required by Article 1724, the claim for the cost of additional works on the Gay Theater building must be denied.[19]

In the instant case, the parties entered into a contract for the execution of all the electrical works at the Ciano Plaza “as shown and described in the plans and specification prepared by RCG Consult (hereinafter referred to as the ARCHITECT/ENGINEER).”[20] The contract was for a fixed price of P5,300,000, with the stipulation that “any addition… or reduction in the cost of work shall be mutually agreed in writing by both the OWNER and [the] CONTRACTOR upon recommendation/advisement of the ARCHITEC/ENGINEERS before execution.”[21] As admitted by both parties, several revisions and deviations from the original plan and specification of the building were introduced during the construction thereof.[22] It appears, however, that though respondent was aware of such revisions and of the consequent increase in the cost of the electrical works, he nevertheless completed the installation of electrical facilities in the constructed building without first entering into a written agreement with the petitioners for the increase in costs. The fact that petitioner Chien testified[23] that his Engineer/Architect, the R.C. Gaite & Associates, recommended payment of the increase in costs, does not prove that he was informed of such increase before the job was completed.[24] The records reveal that the demand letter which in effect notified the petitioners of the increase in the costs of electrical installations was sent by the respondent to petitioners after the completion of the project. [25] This was clearly not in accord with the express stipulation of the parties requiring a prior written agreement authorizing the increased costs, as well as with the provisions of Article 1724.

It must be stressed that the “change in the plans and specifications” referred to in Article 1724 pertains to the very contract entered into by the owner of the building and the contractor. While there is a revision of plan and specification in the instant case, the same pertains to the structural design of the building and not to the electrical installation contract of the parties. The consent given by the petitioners to the revision of the former will not necessarily extend to the latter. As emphasized in Weldon Construction Corporation, the issue of consent to the higher cost could have been determined with facility had the respondent complied with the requirement of a written agreement for additional costs as mandated not only by their contract but also by Article 1724 of the Civil Code. The written consent of the owner to the increased costs sought by the respondent is not a mere formal requisite, but a vital precondition to the validity of a subsequent contract authorizing a higher or additional contract price. Moreover, the safeguards enshrined in the provisions of Article 1724 are not only intended to obviate future misunderstandings but also to give the parties a chance to decide whether to bind one’s self to or withdraw from a contract. Had the increase in costs of the electrical installations been disclosed before completion of the project, petitioners could have

opted to bargain with the respondent or hire another contractor for a cheaper price. Respondent, on the other hand, could have gladly accepted the bargain or simply backed out from the contract instead of gambling on the consequences of assuming the increased costs without the prior written authorization of the petitioners. Indeed, the principle of unjust enrichment cannot be validly invoked by the respondent who, through his own act or omission, took the risk of being denied payment for additional costs by not giving the petitioners prior notice of such costs and/or by not securing their written consent thereto, as required by law and their contract.

Finally, we note that the trial court held petitioner Chien solidarily liable with petitioner Powton. The settled rule is that, a corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when – (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.[26]Considering that none of the foregoing exceptions was established in the case at bar, petitioner Chien, who entered into a contract with respondent in his capacity as President and Chairman of the Board of Powton, cannot be held solidarily liable with the latter.

WHEREFORE, in view of all the foregoing, the instant petition is PARTIALLY GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 65100 is MODIFIED. Petitioner Powton Conglomerate, Inc. is ordered to pay respondent Johnny Agcolicol the sum of P268,139.60 representing the unpaid balance in the “Electrical Installation Contract” between them. Petitioner Philip C. Chien, President and Chairman of the Board of Powton Conglomerate, Inc. is absolved from personal liability.

SO ORDERED.

17. [G.R. No. 125778. June 10, 2003]

INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS and ASIA INDUSTRIES, INC., respondents.

The present petition for review on certiorari assails the Court of Appeals Decision[1] of January 25, 1996 and Resolution[2] of July 11, 1996.

The material facts of the case are as follows:

On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase Agreement[3] (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the outstanding shares of stock of FARMACOR, INC. (FARMACOR).[4] The Agreement was signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private respondent, respectively.[5]

Under paragraph 7 of the Agreement, petitioner as seller made warranties and representations among which were “(iv.) [t]he audited financial statements of FARMACOR at and for the year ended December 31,

1977... and the audited financial statements of FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and Co.]... fairly present or will present the financial position of FARMACOR and the results of its operations as of said respective dates; said financial statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates . . .”; and “(v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00).”[6]

The Agreement was later amended with respect to the “Closing Date,” originally set up at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the mode of payment of the purchase price.[7]

The Agreement, as amended, provided that pending submission by SGV of FARMACOR’s audited financial statements as of October 31, 1978, private respondent may retain the sum of P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this retained amount of P7,500,000.00, private respondent may deduct any shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00;[8] and that if the amount retained is not sufficient to make up for the deficiency in the Minimum Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of receipt of the audited financial statements.[9]

Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon the signing of the Agreement, and P7,000,000.00 on November 2, 1978.[10]

From the STATEMENT OF INCOME AND DEFICIT attached to the financial report[11] dated November 28, 1978 submitted by SGV, it appears that FARMACOR had, for the ten months ended October 31, 1978, a deficit of P11,244,225.00.[12] Since the stockholder’s equity amounted to P10,000,000.00, FARMACOR had a net worth deficiency of P1,244,225.00. The guaranteed net worth shortfall thus amounted to P13,244,225.00 after adding the net worth deficiency of P1,244,225.00 to the Minimum Guaranteed Net Worth of P12,000,000.00.

The adjusted contract price, therefore, amounted to P6,225,775.00 which is the difference between the contract price of P19,500,000.00 and the shortfall in the guaranteed net worth of P13,224,225.00. Private respondent having already paid petitioner P12,000,000.00, it was entitled to a refund of P5,744,225.00.

Petitioner thereafter proposed, by letter[13] of January 24, 1980, signed by its president, that private respondent’s claim for refund be reduced to P4,093,993.00, it promising to pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the amount of P759,570.00. To the proposal respondent agreed. Petitioner, however, weiched on its promise. Petitioner’s total liability thus stood at P4,853,503.00 (P4,093,993.00 plus P759,570.00)[14] exclusive of interest.[15]

On April 5, 1983, private respondent filed a complaint[16] against petitioner with the Regional Trial Court of Makati, one of two causes of action of which was for the recovery of above-said amount of P4,853,503.00[17] plus interest.

Denying private respondent’s claim, petitioner countered that private respondent failed to pay the balance of the purchase price and accordingly set up a counterclaim.

Finding for private respondent, the trial court rendered on November 27, 1991 a Decision,[18] the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a) ordering the latter to pay to the former the sum of P4,853,503.00[19] plus interest thereon at the legal rate from the filing of the complaint until fully paid, the sum of P30,000.00 as attorney’s fees and the costs of suit; and (b) dismissing the counterclaim.

SO ORDERED.

On appeal to the Court of Appeals, petitioner raised the following errors:

THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.

THE TRIAL COURT ERRED IN AWARDING ATTORNEY’S FEES AND IN DISMISSING THE COUNTERCLAIM.

THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION NOT HAVING BEEN SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF.[20]

By Decision of January 25, 1996, the Court of Appeals affirmed the trial court’s decision. Petitioner’s motion for reconsideration of the decision having been denied by the Court of Appeals by Resolution of July 11, 1996, the present petition for review on certiorari was filed, assigning the following errors:

I

THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER BEING ULTRA VIRES.

II

THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A CORPORATION.

III

THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE RESPONDENT.

IV

THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY ATTORNEY’S FEES AND IN SUSTAINING THE DISMISSAL OF THE COUNTERCLAIM.18 (Underscoring in the original)

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of private respondent’s claim for refund upon petitioner’s promise to pay the cost of NOCOSII superstructures in the amount of P759,570.00) which was signed by its president has no legal force and effect against it as it was not authorized by its board of directors, it citing the COrporation Law which provides that unless the act of the president is authorized by the board of directors, the same is not binding on it.

This Court is not persuaded.

The January 24, 1980 letter signed by petitioner’s president is valid and binding. The case of People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals 1 9 instructs:

The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation . A corporation is a juridical person, separate and distinct from its

stockholders and members, “having x x x powers, attributes and properties expressly authorized by law or incident to its existence.”

Being a juridical entity, a corporation may act through its board of directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management, as provided in Section 23 of the Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees x x x.

Under this provision, the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz:

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 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 person dealing with the officer or agent to believe that it has conferred.

x x x

[A]pparent authority is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparentauthority, but the vesting of a corporate officer with power to bind the corporation.

x x x (Emphasis and underscoring supplied)

As correctly argued by private respondent, an officer of a corporation who is authorized to purchase the stock of another corporation has the implied power to perform all other obligations arising therefrom, such as payment of the shares of stock. By allowing its president to sign the Agreement on its behalf, petitioner clothed him with apparent capacity to perform all acts which are expressly, impliedly and inherently stated therein.[21]

Petitioner further argues that when the Agreement was executed on September 1, 1978, its financial statements were extensively examined and accepted as correct by private respondent, hence, it cannot later be disproved “by resorting to some scheme such as future financial auditing;”[22] and that it should not be bound by the SGV Report because it

is self-serving and biased, SGV having been hired solely by private respondent, and the alleged shortfall of FARMACOR occurred only after the execution of the Agreement.

This Court is not persuaded either.

The pertinent provisions of the Agreement read:

7. Warranties and Representations - (a) SELLER warrants and represents as follows:

x x x

(iv) The audited financial statements of FARMACOR as at and for the year ended December 31, 1977 and the audited financial statements of FARMACOR as at September 30, 1978 being preparedby SGV pursuant to paragraph 6(b) fairly present or will present the financial position of FARMACOR and the results of its operations as of said respective dates; said financial statements show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of said respective dates; and the receivables set forth in said financial statements are fully due and collectible, free and clear of any set-offs, defenses, claims and other impediments to their collectibility.

(v) The Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00), Philippine Currency.

x x x (Underscoring in the original; emphasis supplied)[23]

True, private respondent accepted as correct the financial statements submitted to it when the Agreement was executed on September 1, 1978. But petitioner expressly warranted that the SGV Reports “fairly present or will present the financial position of FARMACOR.” By such warranty, petitioner is estopped from claiming that the SGV Reports are self-serving and biased.

As to the claim that the shortfall occurred after the execution of the Agreement, the declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head of the team which conducted the auditing of FARMACOR, that the period covered by the audit was from January to October 1978 shows that the period before the Agreement was entered into (on September 1, 1978) was covered.[24]

As to petitioner’s assigned error on the award of attorney’s fees which, it argues, is bereft of factual, legal and equitable justification, this Court finds the same well-taken.

On the matter of attorney’s fees, it is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsel’s fees are not to be awarded every time a party wins a suit. Thepower of the court to award attorney’s fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the award is a conclusion without a premise, its basisbeing improperly left to speculation and conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorney’s fees.[25]

x x x (Emphasis and underscoring supplied; citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of the Court of Appeals affirming that of the trial court is modified in that the award of attorney’s fees in favor of private respondent is deleted. The decision is affirmed in other respects.

SO ORDERED.

18. [G.R. No. 126006. January 29, 2004]

LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, petitioners, vs. COURT OF APPEALS (Seventeenth Division) and ALLIED BANKING CORP.,respondents

Before the Court is the petition for review on certiorari filed by the Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and set aside the Decision[1] dated June 26, 1996 of the Court of Appeals (CA) in CA-G.R. CV No. 37162 ordering the petitioners, jointly and solidarily, to pay the respondent Allied Banking Corporation the amount of P493,566.61 plus interests and other charges. Likewise, sought to be reversed and set aside is the appellate court’s Resolution dated August 19, 1996 denying the petitioners’ motion for reconsideration.

The case stemmed from the following facts:

Sometime in 1977, petitioner Elias Q. Tan, then President of the co-petitioner Lapulapu Foundation, Inc., obtained four loans from the respondent Allied Banking Corporation covered by four promissory notes in the amounts of P100,000 each. The details of the promissory notes are as follows:

P/N No. Date of P/N Maturity Date Amount as of 1/23/79

BD No. 504 Nov. 7, 1977 Feb. 5, 1978 P123,377.76

BD No. 621 Nov. 28, 1977 Mar. 28, 1978 P123,411.10

BD No. 716 Dec. 12, 1977 Apr. 11, 1978 P122,322.21

BD No. 839 Jan. 5, 1978 May 5, 1978 P120,455.54[2]

As of January 23, 1979, the entire obligation amounted to P493,566.61 and despite demands made on them by the respondent Bank, the petitioners failed to pay the same. The respondent Bank was constrained to file with the Regional Trial Court of Cebu City, Branch 15, a complaint seeking payment by the petitioners, jointly and solidarily, of the sum of P493,566.61 representing their loan obligation, exclusive of interests, penalty charges, attorney’s fees and costs.

In its answer to the complaint, the petitioner Foundation denied incurring indebtedness from the respondent Bank alleging that the loans were obtained by petitioner Tan in his personal capacity, for his own use and benefit and on the strength of the personal information he furnished the respondent Bank. The petitioner Foundation maintained that it never authorized petitioner Tan to co-sign in his capacity as its President any promissory note and that the respondent Bank fully knew that the loans contracted were made in petitioner Tan’s personal capacity and for his own use and that the petitioner Foundation never benefited, directly or indirectly, therefrom. The petitioner Foundation then interposed a cross-claim against petitioner Tan alleging that he, having exceeded his authority, should be solely liable for said loans, and a counterclaim against the respondent Bank for damages and attorney’s fees.

For his part, petitioner Tan admitted that he contracted the loans from the respondent Bank in his personal capacity. The parties, however, agreed that the loans were to be paid from the proceeds of petitioner Tan’s shares of common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were covered by promissory notes which were automatically renewable (“rolled-over”) every year at an amount including unpaid interests, until such time as petitioner Tan was able to pay the same from the proceeds of his aforesaid shares.

According to petitioner Tan, the respondent Bank’s employee required him to affix two signatures on every promissory note, assuring him that the loan documents would be filled out in accordance with their agreement. However, after he signed and delivered the loan documents to the respondent Bank, these were filled out in a manner not in accord with their agreement, such that the petitioner Foundation was included as party thereto. Further, prior to its filing of the complaint, the respondent Bank made no demand on him.

After due trial, the court a quo rendered judgment the dispositive portion of which reads:

WHEREFORE, in view of the foregoing evidences [sic], arguments and considerations, this court hereby finds the preponderance of evidence in favor of the plaintiff and hereby renders judgment as follows:

“1. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc. [the petitioners herein] to pay jointly and solidarily to the plaintiff Allied Banking Corporation [the respondent herein] the amount ofP493,566.61 as principal obligation for the four promissory notes, including all other charges included in the same, with interest at 14% per annum, computed from January 24, 1979, until the same are fully paid, plus 2% service charges and 1% monthly penalty charges.

“2. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay jointly and solidarily, attorney’s fees in the equivalent amount of 25% of the total amount due from the defendants on the promissory notes, including all charges;

“3. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay jointly and solidarily litigation expenses of P1,000.00 plus costs of the suit.”[3]

On appeal, the CA affirmed with modification the judgment of the court a quo by deleting the award of attorney’s fees in favor of the respondent Bank for being without basis.

The appellate court disbelieved petitioner Tan’s claim that the loans were his personal loans as the promissory notes evidencing them showed upon their faces that these were obligations of the petitioner Foundation, as contracted by petitioner Tan himself in his “official and personal character.” Applying the parol evidence rule, the CA likewise rejected petitioner Tan’s assertion that there was an unwritten agreement between him and the respondent Bank that he would pay the loans from the proceeds of his shares of stocks in the Lapulapu Industries Corp.

Further, the CA found that demand had been made by the respondent Bank on the petitioners prior to the filing of the complaint a quo. It noted that the two letters of demand dated January 3, 1979 [4] and January 30, 1979[5] asking settlement of the obligation were sent by the respondent Bank. These were received by the petitioners as shown by the registry return cards[6] presented during trial in the court a quo.

Finally, like the court a quo, the CA applied the doctrine of piercing the veil of corporate entity in holding the petitioners jointly and solidarily liable. The evidence showed that petitioner Tan had represented himself as

the President of the petitioner Foundation, opened savings and current accounts in its behalf, and signed the loan documents for and in behalf of the latter. The CA, likewise, found that the petitioner Foundation had allowed petitioner Tan to act as though he had the authority to contract the loans in its behalf. On the other hand, petitioner Tan could not escape liability as he had used the petitioner Foundation for his benefit.

Aggrieved, the petitioners now come to the Court alleging that:

I. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE LOANS SUBJECT MATTER OF THE INSTANT PETITION ARE ALREADY DUE AND DEMANDABLE DESPITE ABSENCE OF PRIOR DEMAND.

II. THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE PAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT AND SOLIDARY LIABILITY ON THE PART OF PETITIONERS ELIAS Q. TAN AND LAPULAPU FOUNDATION, INC.[7]

The petitioners assail the appellate court’s finding that the loans had become due and demandable in view of the two demand letters sent to them by the respondent Bank. The petitioners insist that there was no prior demand as they vigorously deny receiving those letters. According to petitioner Tan, the signatures on the registry return cards were not his.

The petitioners’ denial of receipt of the demand letters was rightfully given scant consideration by the CA as it held:

Exhibits “R” and “S” are two letters of demand, respectively dated January 3, 1979 and January 30, 1979, asking settlement of the obligations covered by the promissory notes. The first letter was written by Ben Tio Peng Seng, Vice-President of the bank, and addressed to Lapulapu Foundation, Inc., attention of Mr. Elias Q. Tan, President, while the second was a final demand written by the appellee’s counsel, addressed to both defendants-appellants, and giving them five (5) days from receipt within which to settle or judicial action would be instituted against them. Both letters were duly received by the defendants, as shown by the registry return cards, marked as Exhibits “R-2” and “S-1,” respectively. The allegation of Tan that he does not know who signed the said registry return receipts merits scant consideration, for there is no showing that the addresses thereon were wrong. Hence, the disputable presumption “that a letter duly directed and mailed was received in the regular course of mail” (per par. V, Section 3, Rule 131 of the Revised Rules on Evidence) still holds.[8]

There is no dispute that the promissory notes had already matured. However, the petitioners insist that the loans had not become due and demandable as they deny receipt of the respondent Bank’s demand letters. When presented the registry return cards during the trial, petitioner Tan claimed that he did not recognize the signatures thereon. The petitioners’ allegation and denial are self-serving. They cannot prevail over the registry return cards which constitute documentary evidence and which enjoy the presumption that, absent clear and convincing evidence to the contrary, these were regularly issued by the postal officials in the performance of their official duty and that they acted in good faith. [9] Further, as the CA correctly opined, mails are presumed to have been properly delivered and received by the addressee “in the regular course of the mail.” [10] As the CA noted, there is no showing that the addresses on the registry return cards were wrong. It is the petitioners’ burden to overcome the presumptions by sufficient evidence, and other than their barefaced denial, the petitioners failed to support their claim that they did not receive the demand letters; therefore, no prior demand was made on them by the respondent Bank.

Having established that the loans had become due and demandable, the Court shall now resolve the issue of whether the CA correctly held the petitioners jointly and solidarily liable therefor.

In disclaiming any liability for the loans, the petitioner Foundation maintains that these were contracted by petitioner Tan in his personal capacity and that it did not benefit therefrom. On the other hand, while admitting that the loans were his personal obligation, petitioner Tan avers that he had an unwritten agreement with the respondent Bank that these loans would be renewed on a year-to-year basis and paid from the proceeds of his shares of stock in the Lapulapu Industries Corp.

These contentions are untenable.

The Court particularly finds as incredulous petitioner Tan’s allegation that he was made to sign blank loan documents and that the phrase “IN MY OFFICIAL/PERSONAL CAPACITY” was superimposed by the respondent Bank’s employee despite petitioner Tan’s protestation. The Court is hard pressed to believe that a businessman of petitioner Tan’s stature could have been so careless as to sign blank loan documents.

In contrast, as found by the CA, the promissory notes[11] clearly showed upon their faces that they are the obligation of the petitioner Foundation, as contracted by petitioner Tan “in his official and personal capacity.”[12] Moreover, the application for credit accommodation,[13] the signature cards of the two accounts in the name of petitioner Foundation,[14] as well as New Current Account Record,[15] all accompanying the promissory notes, were signed by petitioner Tan for and in the name of the petitioner Foundation.[16] These documentary evidence unequivocally and categorically establish that the loans were solidarily contracted by the petitioner Foundation and petitioner Tan.

As a corollary, the parol evidence rule likewise constrains this Court to reject petitioner Tan’s claim regarding the purported unwritten agreement between him and the respondent Bank on the payment of the obligation. Section 9, Rule 130 of the of the Revised Rules of Court provides that “[w]hen the terms of an agreement have been reduced to writing, it is to be considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement.”[17]

In this case, the promissory notes are the law between the petitioners and the respondent Bank. These promissory notes contained maturity dates as follows: February 5, 1978, March 28, 1978, April 11, 1978 and May 5, 1978, respectively. That these notes were to be paid on these dates is clear and explicit. Nowhere was it stated therein that they would be renewed on a year-to-year basis or “rolled-over” annually until paid from the proceeds of petitioner Tan’s shares in the Lapulapu Industries Corp. Accordingly, this purported unwritten agreement could not be made to vary or contradict the terms and conditions in the promissory notes.

Evidence of a prior or contemporaneous verbal agreement is generally not admissible to vary, contradict or defeat the operation of a valid contract.[18] While parol evidence is admissible to explain the meaning of written contracts, it cannot serve the purpose of incorporating into the contract additional contemporaneous conditions which are not mentioned at all in writing, unless there has been fraud or mistake. [19] No such allegation had been made by the petitioners in this case.

Finally, the appellate court did not err in holding the petitioners jointly and solidarily liable as it applied the doctrine of piercing the veil of corporate entity. The petitioner Foundation asserts that it has a personality separate and distinct from that of its President, petitioner Tan, and that it cannot be held solidarily liable for the loans of the latter.

The Court agrees with the CA that the petitioners cannot hide behind the corporate veil under the following circumstances:

The evidence shows that Tan has been representing himself as the President of Lapulapu Foundation, Inc. He opened a savings account and a current account in the names of the corporation, and signed the application form as well as the necessary specimen signature cards (Exhibits “A,” “B” and “C”) twice, for himself and for the foundation. He submitted a notarized Secretary’s Certificate (Exhibit “G”) from the corporation, attesting that he has been authorized, inter alia , to sign for and in behalf of the Lapulapu Foundation any and all checks, drafts or other orders with respect to the bank; to transact business with the Bank, negotiate loans, agreements, obligations, promissory notes and other commercial documents; and to initially obtain a loan for P 100,000.00 from any bank (Exhibits “G-1” and “G-2”). Under these circumstances, the defendant corporation is liable for the transactions entered into by Tan on its behalf.[20]

Per its Secretary’s Certificate, the petitioner Foundation had given its President, petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner Tan’s authority to obtain the subject loans from the respondent Bank. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.[21]

In fine, there is no cogent reason to deviate from the CA’s ruling that the petitioners are jointly and solidarily liable for the loans contracted with the respondent Bank.

WHEREFORE, premises considered, the petition is DENIED and the Decision dated June 26, 1996 and Resolution dated August 19, 1996 of the Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in toto.

SO ORDERED.