corpo cases iv. control and management of a corp

CORPO LAWCASES: IV. Control & Management of a Corp.

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[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.

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 (P10.00) 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 associations 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


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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.


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On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioners 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 petitioners 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 Associations 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 associations 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]


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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


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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 petitioners 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 not 92 of the present law or 29 of the former one 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


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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 officio members, 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


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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 petitioners 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 petitioners representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated petitioners 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 petitioners 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.

G.R. No. L-45911 April 11, 1979JOHN 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.SEC CASE NO 1375


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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


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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,


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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.


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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.


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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


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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


14

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:


15

(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


16

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


17

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

I

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

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

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

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

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits "because public interest demands an early disposition of the


18

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-


19

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


20

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


21

settled throughout the United States that in the absence of positive legislative provisions limiting it, every private corporation has this inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees ... " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the validity of a provision in the corporate 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


22

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


23

... 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


24

"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.


25

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.


26

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


27

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

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

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

The argument for prohibiting competing corporations from sharing even one director is that the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete —


28

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-


29

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


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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


31

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

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

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. 62

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


32

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


33

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


34

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


35

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.

[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.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


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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. SALASCorporate 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 WITs 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


37

covered by the corporations 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 corporations 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


38

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 of P19,500.00 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.


39

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 and Corporate Secretary - P3,500.00/month, retroactive June 1, 1985 and the


40

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. SALASCorporate 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


41

pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098[16] since the trial courts 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 courts 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


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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


43

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.

[G.R. No. 144767. March 21, 2002]DILY DANY NACPIL, petitioner, vs. INTERNATIONAL BROADCASTING CORPORATION, respondent.


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This is a petition for review on certiorari under Rule 45, assailing the Decision of the Court of Appeals dated November 23, 1999 in CA-G.R. SP No. 52755[1] and the Resolution dated August 31, 2000 denying petitioner Dily Dany Nacpil's motion for reconsideration. The Court of Appeals reversed the decisions promulgated by the Labor Arbiter and the National Labor Relations Commission (NLRC), which consistently ruled in favor of petitioner.

Petitioner states that he was Assistant General Manager for Finance/Administration and Comptroller of private respondent Intercontinental Broadcasting Corporation (IBC) from 1996 until April 1997. According to petitioner, when Emiliano Templo was appointed to replace IBC President Tomas Gomez III sometime in March 1997, the former told the Board of Directors that as soon as he assumes the IBC presidency, he would terminate the services of petitioner. Apparently, Templo blamed petitioner, along with a certain Mr. Basilio and Mr. Gomez, for the prior mismanagement of IBC. Upon his assumption of the IBC presidency, Templo allegedly harassed, insulted, humiliated and pressured petitioner into resigning until the latter was forced to retire. However, Templo refused to pay him his retirement benefits, allegedly because he had not yet secured the clearances from the Presidential Commission on Good Government and the Commission on Audit. Furthermore, Templo allegedly refused to recognize petitioners employment, claiming that petitioner was not the Assistant General Manager/Comptroller of IBC but merely usurped the powers of the Comptroller. Hence, in 1997, petitioner filed with the Labor Arbiter a complaint for illegal dismissal and non-payment of benefits.

Instead of filing its position paper, IBC filed a motion to dismiss alleging that the Labor Arbiter had no jurisdiction over the case. IBC contended that petitioner was a corporate officer who was duly elected by the Board of Directors of IBC; hence, the case qualifies as an intra-corporate dispute falling within the jurisdiction of the Securities and Exchange Commission (SEC). However, the motion was denied by the Labor Arbiter in an Order dated April 22, 1998.[2]

On August 21, 1998, the Labor Arbiter rendered a Decision stating that petitioner had been illegally dismissed. The dispositive portion thereof reads:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the complainant and against all the respondents, jointly and severally, SO ORDERED.[3]

IBC appealed to the NLRC, but the same was dismissed in a Resolution dated March 2, 1999, for its failure to file the required appeal bond in accordance with Article 223 of the Labor Code.[4] IBC then filed a motion for reconsideration that was likewise denied in a Resolution dated April 26, 1999.[5]

IBC then filed with the Court of Appeals a petition for certiorari under Rule 65, which petition was granted by the appellate court in its Decision dated November 23, 1999. The dispositive portion of said decision states:


45

WHEREFORE, premises considered, the petition for Certiorari is GRANTED. The assailed decisions of the Labor Arbiter and the NLRC are REVERSED and SET ASIDE and the complaint is DISMISSED without prejudice.

SO ORDERED.[6]

Petitioner then filed a motion for reconsideration, which was denied by the appellate court in a Resolution dated August 31, 2000.

Hence, this petition.

Petitioner Nacpil submits that:

I.

THE COURT OF APPEALS ERRED IN FINDING THAT PETITIONER WAS APPOINTED BY RESPONDENTS BOARD OF DIRECTORS AS COMPTROLLER. THIS FINDING IS CONTRARY TO THE COMMON, CONSISTENT POSITION AND ADMISSION OF BOTH PARTIES. FURTHER, RESPONDENTS BY-LAWS DOES NOT INCLUDE COMPTROLLER AS ONE OF ITS CORPORATE OFFICERS.

II.

THE COURT OF APPEALS WENT BEYOND THE ISSUE OF THE CASE WHEN IT SUBSTITUTED THE NATIONAL LABOR RELATIONS COMMISSIONS DECISION TO APPLY THE APPEAL BOND REQUIREMENT STRICTLY IN THE INSTANT CASE. THE ONLY ISSUE FOR ITS DETERMINATION IS WHETHER NLRC COMMITTED GRAVE ABUSE OF DISCRETION IN DOING THE SAME.[7]

The issue to be resolved is whether the Labor Arbiter had jurisdiction over the case for illegal dismissal and non-payment of benefits filed by petitioner. The Court finds that the Labor Arbiter had no jurisdiction over the same.

Under Presidential Decree No. 902-A (the Revised Securities Act), the law in force when the complaint for illegal dismissal was instituted by petitioner in 1997, the following cases fall under the exclusive of the SEC:

a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission;


46

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;

c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations;

d) Petitions of corporations, partnerships, or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all of its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this decree. (Emphasis supplied.)

The Court has consistently held that there are two elements to be considered in determining whether the SEC has jurisdiction over the controversy, to wit: (1) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy.[8]

Petitioner argues that he is not a corporate officer of the IBC but an employee thereof since he had not been elected nor appointed as Comptroller and Assistant Manager by the IBCs Board of Directors. He points out that he had actually been appointed as such on January 11, 1995 by the IBCs General Manager, Ceferino Basilio. In support of his argument, petitioner underscores the fact that the IBCs By-Laws does not even include the position of comptroller in its roster of corporate officers.[9] He therefore contends that his dismissal is a controversy falling within the jurisdiction of the labor courts.[10]

Petitioners argument is untenable. Even assuming that he was in fact appointed by the General Manager, such appointment was subsequently approved by the Board of Directors of the IBC.[11] That the position of Comptroller is not expressly mentioned among the officers of the IBC in the By-Laws is of no moment, because the IBCs Board of Directors is empowered under Section 25 of the Corporation Code[12] and under the corporations By-Laws to appoint such other officers as it may deem necessary. The By-Laws of the IBC categorically provides:

XII. OFFICERS

The officers of the corporation shall consist of a President, a Vice-President, a Secretary-Treasurer, a General Manager, and such other officers as the Board of Directors may from time to time does fit to provide for. Said officers shall be elected by majority vote of the Board of Directors and shall have such powers and duties as shall hereinafter provide (Emphasis supplied).[13]


47

The Court has held that in most cases the by-laws may and usually do provide for such other officers,[14] and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the board of directors may also be empowered under the by-laws to create additional officers as may be necessary.[15]

An office has been defined as a creation of the charter of a corporation, while an officer as a person elected by the directors or stockholders. On the other hand, an employee occupies no office and is generally employed not by action of the directors and stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.[16]

As petitioners appointment as comptroller required the approval and formal action of the IBCs Board of Directors to become valid,[17] it is clear therefore holds that petitioner is a corporate officer whose dismissal may be the subject of a controversy cognizable by the SEC under Section 5(c) of P.D. 902-A which includes controversies involving both election and appointment of corporate directors, trustees, officers, and managers.[18] Had petitioner been an ordinary employee, such board action would not have been required.

Thus, the Court of Appeals correctly held that:

Since complainants appointment was approved unanimously by the Board of Directors of the corporation, he is therefore considered a corporate officer and his claim of illegal dismissal is a controversy that falls under the jurisdiction of the SEC as contemplated by Section 5 of P.D. 902-A. The rule is that dismissal or non-appointment of a corporate officer is clearly an intra-corporate matter and jurisdiction over the case properly belongs to the SEC, not to the NLRC.[19]

As to petitioners argument that the nature of his functions is recommendatory thereby making him a mere managerial officer, the Court has previously held that the relationship of a person to a corporation, whether as officer or agent or employee is not determined by the nature of the services performed, but instead by the incidents of the relationship as they actually exist.[20]

It is likewise of no consequence that petitioner's complaint for illegal dismissal includes money claims, for such claims are actually part of the perquisites of his position in, and therefore linked with his relations with, the corporation. The inclusion of such money claims does not convert the issue into a simple labor problem. Clearly, the issues raised by petitioner against the IBC are matters that come within the area of corporate affairs and management, and constitute a corporate controversy in contemplation of the Corporation Code.[21]

Petitioner further argues that the IBC failed to perfect its appeal from the Labor Arbiters Decision for its non-payment of the appeal bond as required under Article 223 of the Labor Code, since compliance with the requirement of posting of a cash or surety bond in an amount equivalent to the monetary award in the judgment appealed from has been held to be both


48

mandatory and jurisdictional.[22] Hence, the Decision of the Labor Arbiter had long become final and executory and thus, the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of jurisdiction in giving due course to the IBCs petition for certiorari, and in deciding the case on the merits.

The IBCs failure to post an appeal bond within the period mandated under Article 223 of the Labor Code has been rendered immaterial by the fact that the Labor Arbiter did not have jurisdiction over the case since as stated earlier, the same is in the nature of an intra-corporate controversy. The Court has consistently held that where there is a finding that any decision was rendered without jurisdiction, the action shall be dismissed. Such defense can be interposed at any time, during appeal or even after final judgment.[23] It is a well-settled rule that jurisdiction is conferred only by the Constitution or by law. It cannot be fixed by the will of the parties; it cannot be acquired through, enlarged or diminished by, any act or omission of the parties.[24]

Considering the foregoing, the Court holds that no error was committed by the Court of Appeals in dismissing the case filed before the Labor Arbiter, without prejudice to the filing of an appropriate action in the proper court.

It must be noted that under Section 5.2 of the Securities Regulation Code (Republic Act No. 8799) which was signed into law by then President Joseph Ejercito Estrada on July 19, 2000, the SECs jurisdiction over all cases enumerated in Section 5 of P.D. 902-A has been transferred to the Regional Trial Courts.[25]

WHEREFORE, the petition is hereby DISMISSED and the Decision of the Court of Appeals in CA-G.R. SP No. 52755 is AFFIRMED.

[G.R. No. 117847. October 7, 1998]PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs. COURT OF APPEALS and STEFANI SAO, respondents.This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670.

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

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


49

Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed to the Court of Appeals[4] (CA) which, in its Decision promulgated February 28, 1994, granted his prayer for P400,000, as follows:[5]

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

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

The Facts

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

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

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

On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter, confirming their agreement.

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

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:


50

1. Operations Manual

2. Seminar/workshop for your employees

P400,000 - package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

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

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

1st letter - 4 Dec. 1986

2nd letter - 15 June 1987 with Hinanakit.

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

On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then Commissioner Alex Padilla, a position he held until he became technical assistant to then Commissioner Miriam Defensor-Santiago on March 7, 1988.[15] Meanwhile, Punsalan sold his shares in petitioner-corporation and resigned as its president in 1987.[16]

On February 9, 1988, private respondent filed a collection suit against petitioner. He alleged that he had prepared an operations manual for petitioner, conducted a 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


51

that a group of employees of the company had been commissioned by the board of directors to prepare an operations manual.[17]

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

The Ruling of the Court of Appeals

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

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

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

The Issues

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

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

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


52

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

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

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

The Courts Ruling

The petition is not meritorious.

First Issue: Apparent Authority of a Corporate President

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

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

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

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

Under this provision, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law.[24] However, just as a natural person


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

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

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

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

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

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


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

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

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

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

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

Second Issue: Alleged Simulation of the First Contract

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


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xxx The October 1986 transaction with [private respondent] involved P350,000. The same was embodied in a letter which bore therein not only the conformity of [petitioners] then President Punsalan but also drew a letter-confirmation from the latter for, indeed, he was clothed with authority to enter into the contract after the same was brought to the attention and consideration of [petitioner]. Not only that, a [down payment] was made. In the alleged agreement of December 4, 1986 subject of the present case, the amount is even bigger-P400,000.00. Yet, the alleged letter-agreement drew no letter of confirmation. And no [down payment] and postdated checks were given. Until the filing of the present case in February 1988, no written demand for payment was sent to [petitioner]. [Private respondents] claim that he sent one in writing, and one was sent by his counsel who manifested that [h]e was looking for a copy in [his] files fails in light of his failure to present any such copy. These and the following considerations, to wit:

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

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 Punsalans writing allegedly in June 1987 on the alleged letter-agreement of your employees[,] when it should have been our employees, as he was then still connected with [petitioner], indicate that the letter-agreement was signed by Punsalan when he was no longer connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioners] authority and must have been done in collusion with plaintiff in order to unlawfully get some money from [petitioner]?

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

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

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

7) Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual examination in a petition for review under Rule 45 of the Rules of Court.[35] This rule,


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however, admits of exceptions, one of which is a conflict between the factual findings of the lower and of the appellate courts[36] as in the case at bar.

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

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

Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting parties.[42] The circumstances outlined above do not establish any intention to simulate the contract in dispute. On 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.


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G.R. No. L-68555 March 19, 1993PRIME WHITE CEMENT CORPORATION, petitioner, vs.HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

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:


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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


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

ITHE 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.IITHE 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.IIITHE 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.IVTHE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.VIN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.

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

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


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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;


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

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

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

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

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

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


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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.

[G.R. No. 101699. March 13, 1996]BENJAMIN A. SANTOS, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, HON. LABOR ARBITER FRUCTUOSO T. AURELLANO and MELVIN D. MILLENA, respondents.Private respondent, on 01 October 1985, was hired to be the project accountant for MMDCs mining operations in Gatbo, Bacon, Sorsogon. On 12 August 1986, private respondent sent to Mr. Gil Abao, the MMDC corporate treasurer, a memorandum calling the latters attention to the failure of the company to comply with the withholding tax requirements of, and to make the corresponding monthly remittances to, the Bureau of Internal Revenue (BIR) on account of delayed payments of accrued salaries to the companys laborers and employees.[1]

In a letter, dated 08 September 1986, Abano advised private respondent thusly:

Regarding Gatbo operations, as you also are aware, the rainy season is now upon us and the peace and order condition in Sorsogon has deteriorated. It is therefore, the boards decision that it would be useless for us to continue operations, especially if we will always be in the hole, so to speak. Our first funds receipts will be used to pay all our debts. We will stop production until


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the advent of the dry season, and until the insurgency problem clears. We will undertake only necessary maintenance and repair work and will keep our overhead down to the minimum manageable level. Until we resume full-scale operations, we will not need a project accountant as there will be very little paper work at the site, which can be easily handled at Makati.

We appreciate the work you have done for Mana and we will not hesitate to take you back when we resume work at Gatbo. However it would be unfair to you if we kept you in the payroll and deprive you of the opportunity to earn more, during this period of Manas crisis.[2]

Private respondent expressed shock over the termination of his employment. He complained that he would not have resigned from the Sycip, Gorres & Velayo accounting firm, where he was already a senior staff auditor, had it not been for the assurance of a continuos job by MMDCs Engr. Rodillano E. Velasquez. Private respondent requested that he be reimbursed the advances he had made for the company and be paid his accrued salaries/claims.[3]

The claim was not heeded; on 20 October 1986, private respondent filed with the NLRC Regional Arbitration, Branch No. V, in Legazpi City, a complaint for illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation pay and incentive leave pay against MMDC and its two top officials, namely, herein petitioner Benjamin A. Santos (the President) and Rodillano A. Velasquez (the executive vice-president). In his complaint-affidavit (position paper), submitted on 27 October 1986, Millena alleged, among other things, that his dismissal was merely an offshoot of his letter of 12 August 1986 to Abao about the companys inability to pay its workers and to remit withholding taxes to the BIR.[4]

A copy of the notice and summons was served on therein respondent (MMDC, Santos and Velasquez) on 29 October 1986.[5] At the initial hearing on 14 November 1986 before the Labor Arbiter, only the complaint, Millena, appeared; however, Atty. Romeo Perez, in representation of the respondents, requested by telegram that the hearing be reset to 01 December 1986. Although the request was granted by the Labor Arbiter, private respondent was allowed, nevertheless, to present his evidence ex-parte at that initial hearing.

The scheduled 01st December 1986 hearing was itself later reset to 19 December 1986. On 05 December 1986, the NLRC in Legazpi City again received a telegram from Atty. Perez asking for fifteen (15) days within which to submit the respondents position paper. On 19 December 1986, Atty. Perez sent yet another telegram seeking a further postponement of the hearing and asking for a period until 15 January 1987 within which to submit the position paper.

On 15 January 1987, Atty. Perez advised the NLRC in Legazpi City that the position paper had finally been transmitted through the mail and that he was submitting the case for resolution without further hearing. The position paper was received by the Legazpi City NLRC office on 19 January 1987. Complainant Millena filed, on 26 February 1987, his rejoinder to the position paper.


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On 27 July 1988, Labor Arbiter Fructouso T. Aurellano, finding no valid cause for terminating complainants employment, ruled, citing this Courts pronouncement in Construction & Development Corporation of the Philippines vs. Leogardo, Jr.[6] that a partial closure of an establishment due to losses was a retrenchment measure that rendered the employer liable for unpaid salaries and other monetary claims. The Labor Arbiter adjudged:

WHEREFORE, the respondents are hereby ordered to pay the petitioner the amount of P37,132.25 corresponding to the latters unpaid salaries and advances: P5,400.00 for petitioners 13th month pay; P3,340.95 as service incentive leave pay; and P5,400.00 as separation pay. The respondents are further ordered to pay the petitioner 10% of the monetary awards as attorneys fees.

All other claims are dismissed for lack of sufficient evidence.

SO ORDERED.[7]

Alleging abuse of discretion by the Labor Arbiter, the company and its co-respondents filed a motion for reconsideration and/or appeal.[8] The motion/ appeal was forthwith indorsed to the Executive Director of the NLRC in Manila.

In a resolution, dated 04 September 1989, the NLRC[9] affirmed the decision of the Labor Arbiter. It held that the reasons relied upon by MMDC and its co-respondents in the dismissal of Millena, i.e., the rainy season, deteriorating peace and order situation and little paperwork, were not causes mentioned under Article 282 of the Labor Code of the Philippines and that Millena, being a regular employee, was shielded by the tenurial clause mandated under the law.[10]

A writ of execution correspondingly issued; however, it was returned unsatisfied for the failure of the sheriff to locate the offices of the corporation in the address indicated. Another writ of execution and an order of garnishment was thereupon served on petitioner at his residence.

Contending that he had been denied due process, petitioner filed a motion for reconsideration of the NLRC s resolution along with a prayer for the quashal of the writ of execution and order of garnishment. He averred that he had never received any notice, summons or even a copy of the complaint; hence, he said, the Labor Arbiter at no time had acquired jurisdiction over him.

On 16 August 1991, the NLRC[11] dismissed the motion for reconsideration. Citing Section 2, Rule 13,[12] and Section 13, Rule 14,[13] of the Rules of Court, it ruled that the Regional Arbitration office had not, in fact, been remiss in the observance of the legal processes for acquiring jurisdiction over the case and over the persons of the respondents therein. The NLRC was also convinced that Atty. Perez had been the authorized counsel of MMDC and its two most ranking officers.


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In holding petitioner personally liable for private respondents claim, the NLRC cited Article 289[14] of the Labor Code and the ruling in A.C. Ransom Labor Union-CCLU vs. NLRC[15] to the effect that (t)he responsible officer of an employer corporation (could) be held personally, not to say even criminally, liable for non-payment of backwages, and that of Gudez vs. NLRC[16] which amplified that where the employer corporation (was) no longer existing and unable to satisfy the judgment in favor of the employee, the officer should be liable for acting on behalf of the corporation.

In the instant petition for certiorari, petitioner Santos reiterates that he should not have been adjudged personally liable by public respondents, the latter not having validly acquired jurisdiction over his person whether by personal service of summons or by substituted service under Rule 19 of the Rules of Court.

Petitioner s contention is unacceptable. The fact that Atty. Romeo B. Perez has been able to timely ask for a deferment of the initial hearing on 14 November 1986, coupled with his subsequent active participation in the proceedings, should disprove the supposed want of service of legal process. Although as a rule, modes of service of summons are strictly followed in order that the court may acquire jurisdiction over the person of a defendant,[17] such procedural modes, however, are liberally construed in quasi-judicial proceedings, substantial compliance with the same being considered adequate.[18] Moreover, jurisdiction over the person of the defendant in civil cases is acquired not only by service of summons but also by voluntary appearance in court and submission to its authority.[19] Appearance by a legal advocate is such voluntary submission to a courts jurisdiction.[20] It may be made not only by actual physical appearance but likewise by the submission of pleadings in compliance with the order of the court or tribunal.

To say that petitioner did not authorize Atty. Perez to represent him in the case[21] is to unduly tax credulity. Like the Solicitor General, the Court likewise considers it unlikely that Atty. Perez would have been so irresponsible as to represent petitioner if he were not, in fact, authorized.[22] Atty. Perez is an officer of the court, and he must be presumed to have acted with due propriety. The employment of a counsel or the authority to employ an attorney, it might be pointed out, need not be proved in writing; such fact could inferred from circumstantial evidence.[23] Petitioner was not just an ordinary official of the MMDC; he was the President of the company.

Petitioner, in any event, argues that public respondents have gravely abused their discretion in finding petitioner solidarily liable with MMDC even (in) the absence of bad faith and malice on his part.[24] There is merit in this plea.

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 rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can


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exist to warrant, albeit done sparingly, the disregard of its independent being and the lifting of the corporate veil.[25] As a rule, this situation might arise when a corporation is used to evade a just and due obligation or to justify a wrong,[26] to shield or perpetrate fraud,[27] to carry out similar other unjustifiable aims or intentions, or as a subterfuge to commit injustice and so circumvent the law.[28] In Tramat Mercantile, Inc., vs. Court of Appeals,[29] the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: 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 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.

The case of petitioner is way off these exceptional instances. It is not even shown that petitioner has had a direct hand in the dismissal of private respondent enough to attribute to him (petitioner) a patently unlawful act while acting for the corporation. Neither can Article 289[30] of the Labor Code be applied since this law specifically refers only to the imposition of penalties under the Code. It is undisputed that the termination of petitioners employment has, instead, been due, collectively, to the need for a further mitigation of losses, the onset of the rainy season, the insurgency problem in Sorsogon and the lack of funds to further support the mining operation in Gatbo.

It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC,[31] for instance, the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable for nonpayment of backwages for (i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of backwages. In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court considered the President of the corporation as such officer. The case was cited in Chua vs. NLRC[32] in holding personally liable the vice-president of the company, being the highest and most ranking official of the corporation next to the President who was dismissed for the latters claim for unpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction personal liability on the part of the company officer.


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In A.C. Ransom, the corporate entity was a family corporation and execution against it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The doctrine of piercing the veil of corporate fiction was thus clearly appropriate. Chua likewise involved another family corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers by the other.

The basic rule is still that which can be deduced from the Courts pronouncement in Sunio vs. National Labor Relations Commission;[33] thus:

We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Directors Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half () interest of said corporation, and his alleged arbitrary dismissal of private respondents.

Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents back salaries.

The Court, to be sure, did appear to have deviated somewhat in Gudez vs. NLRC;[34] however, it should be clear from our recent pronouncement in Mam Realty Development Corporation and Manuel Centeno vs. NLRC[35] that the Sunio doctrine still prevails.

WHEREFORE, the instant petition for certiorari is given DUE COURSE and the decision of the Labor Arbiter, affirmed by the NLRC, is hereby MODIFIED insofar as it holds herein petitioner Benjamin Santos personally liable with Mana Mining and Development Corporation, which portion of the questioned judgment is now SET ASIDE. In all other respects, the questioned decision remains unaffected. No costs.

SO ORDERED.


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G.R. No. 159795 July 30, 2004SPOUSES ROBERTO & EVELYN DAVID and COORDINATED GROUP, INC., petitioners, vs.CONSTRUCTION INDUSTRY AND ARBITRATION COMMISSION and SPS. NARCISO & AIDA QUIAMBAO, respondents.

The records reveal that on October 7, 1997, respondent-spouses NARCISO and AIDA QUIAMBAO engaged the services of petitioner CGI to design and construct a five-storey concrete office/residential building on their land in Tondo, Manila. The Design/Build Contract of the parties provided that: (a) petitioner CGI shall prepare the working drawings for the construction project; (b) respondents shall pay petitioner CGI the sum of Seven Million Three Hundred Nine Thousand Eight Hundred Twenty-One and 51/100 Pesos (P7,309,821.51) for the construction of the building, including the costs of labor, materials and equipment, and Two Hundred Thousand Pesos (P200,000.00) for the cost of the design; and (c) the construction of the building shall be completed within nine (9) months after securing the building permit.

The completion of the construction was initially scheduled on or before July 16, 1998 but was extended to November 15, 1998 upon agreement of the parties. It appears, however, that petitioners failed to follow the specifications and plans as previously agreed upon. Respondents demanded the correction of the errors but petitioners failed to act on their complaint. Consequently, respondents rescinded the contract on October 31, 1998, after paying 74.84% of the cost of construction.

Respondents then engaged the services of another contractor, RRA and Associates, to inspect the project and assess the actual accomplishment of petitioners in the construction of the building. It was found that petitioners revised and deviated from the structural plan of the building without notice to or approval by the respondents.1

Respondents filed a case for breach of contract against petitioners before the Regional Trial Court (RTC) of Manila. At the pre-trial conference, the parties agreed to submit the case for arbitration to the CONSTRUCTION INDUSTRY ARBITRATION COMMISSION (CIAC). Respondents filed a request2 for arbitration with the CIAC and nominated Atty. Custodio O. Parlade as arbitrator. Atty. Parlade was appointed by the CIAC as sole arbitrator to resolve the dispute. With the agreement of the parties, Atty. Parlade designated Engr. Loreto C. Aquino to assist him in assessing the technical aspect of the case. The RTC of Manila then dismissed the case and transmitted its records to the CIAC.3

After conducting hearings and two (2) ocular inspections of the construction site, the arbitrator rendered judgment against petitionersThere is likewise an award in favor of the Respondents (petitioners herein) and against the Claimants (respondents herein) for the value of the materials and equipment left at (the) site (in) the amount of P238,372.75. Respondent CGI is likewise credited with an 80% accomplishment having a total value of P5,847,857.20.


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All other claims and counterclaims are hereby dismissed for lack of merit.

Deducting this amount of P6,086,229.95 from P10,159,459.89, the result is a net award in favor the Claimants of (sic) the amount of P4,073,229.94.

WHEREFORE, the Respondents are hereby ordered to pay, jointly and severally, the Claimants the amount of P4,073,229.94 with interest at 6% per annum from the date of the promulgation of this Award, and 12% per annum of the net award, including accrued interest, from the time it becomes final and executory until it is fully paid.

Each party is hereby directed to pay to the Commission P15,000.00 as such party’s share in the expert’s fees paid to Engr. Loreto C. Aquino.

SO ORDERED.4

Petitioners appealed to the Court of Appeals which affirmed the arbitrator’s Decision but deleted the award for lost rentals.5

Unsatisfied, petitioners filed this petition for review on certiorari, raising the following issues:

I. THERE WAS NO BASIS, IN FACT AND IN LAW, TO ALLOW RESPONDENTS TO UNILATERALLY RESCIND THE DESIGN/BUILT CONTRACT, AFTER PETITIONERS HAVE (SIC) SUBSTANTIALLY PERFORMED THEIR OBLIGATION UNDER THE SAID CONTRACT.

II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS JOINTLY AND SEVERALLY LIABLE WITH CO-PETITIONER COORDINATED (GROUP, INC.), IN CLEAR VIOLATION OF THE DOCTRINE OF SEPARATE JURIDICAL PERSONALITY.

We find no merit in the petition.

Executive Order No. 1008 entitled, "Construction Industry Arbitration Law" provided for an arbitration mechanism for the speedy resolution of construction disputes other than by court litigation. It recognized the role of the construction industry in the country’s economic progress as it utilizes a large segment of the labor force and contributes substantially to the gross national product of the country.6 Thus, E.O. No. 1008 vests on the Construction Industry Arbitration Commission (CIAC) original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties who have agreed to submit their case to voluntary arbitration. Section 19 of E.O. No. 1008 provides that its arbitral award shall be appealable to the Supreme Court only on questions of law.7


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There is a question of law when the doubt or difference in a given case arises as to what the law is on a certain set of facts, and there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts.8 Thus, for a question to be one of law, it must not involve an examination of the probative value of the evidence presented by the parties and there must be no doubt as to the veracity or falsehood of the facts alleged.9

In the case at bar, it is readily apparent that petitioners are raising questions of fact. In their first assigned error, petitioners claim that at the time of rescission, they had completed 80% of the construction work and still have 15 days to finish the project. They likewise insist that they constructed the building in accordance with the contract and any modification on the plan was with the consent of the respondents.

These claims of petitioners are refuted by the evidence on record. In holding that respondents were justified in rescinding the contract, the Court of Appeals upheld the factual findings of the sole arbitrator, thus:

x x x

(A)s the Building was taking shape, they noticed deviations from the approved plans and specifications for the Building. Most noticeable were two (2) concrete columns in the middle of the basement which effectively and permanently obstructed the basement for the parking of vehicles x x x. In addition, three (3) additional concrete columns were constructed from the ground floor to the roof deck x x x which affected the overall dimension of the building such as altering the specified beam depths, passageways and windows. In addition, Mrs. Quiambao provided a virtual litany of alleged defects, to wit: (a) the Building was not vertically plumbed xxx; (b) provisions for many architectural members were not provided for, such as, (i) the recesses for window plant boxes are lacking xxx, (ii) provisions for precast molding are lacking xxx, (iii) canopies are also lacking x x x; (c) misaligned walls, ugly discrepancies and gaps; (d) skewed walls to floors/landings; (e) low head clearances and truncated beams x x x; (f) narrow and disproportionate stairs xxx one (1) instead of two (2) windows at the fire exit x x x, (g) absence of water-proofing along the basement wall x x x and at the roof deck which caused leaks that damages the mezzanine floor x x x; (h) the use of smaller diagonal steel trusses at the penthouse. x x x There were others which were shown during the site inspection such as: (1) L-shaped kitchen counters instead of the required U-shaped counters x x x; (2) failure to provide marble tops for the kitchen counters; (3) installation of single-tub sinks where the plans called for double-type stainless kitchen sinks x x x; (4) installation of much smaller windows than those required; (5) misaligned window easements to wall, (6) floors were damaged by roof leaks, (6) poor floor finish, misaligned tiles, floors with "kapak" and disproportionate drawers and cabinets. A more comprehensive list of alleged defects, deviations and complaints of the Quiambaos is found in a report marked Exhibit C-144. Many of these defects were seen during the site inspection and the only defense and comment of CGI was that these were punch-list items which could have been corrected prior to completion and turn-over of the Building had


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the Contract not been terminated by the Claimants (respondents here). x x x Thus, x x x (petitioner) CGI argued that: "In any construction work, before a contractor turns-over the project to the owner, punchlisting of defects is done so as to ensure compliance and satisfaction of both the contractor and the owner. Punch listing means that the contractor will list all major and minor defects and rectifies them before the turnover of the project to the owner. After all defects had been arranged, the project is now turned over to the owner. For this particular project, no turn over was made by the contractor to the owner yet. Actually, we were already pinpointing these defects for punch listing before we were terminated illegally. As alleged by the owner, the deficiencies mentioned are stubouts of water closets at toilets, roofing and framing, doors, cabinets, ceiling and stairs and other were not yet completed and rectified by us. In fact we were counting on our project engineer in charge x x x to do this in as much as this is one of his duties to do for the company. x x x" Confirmatory of this assertion of CGI that it was willing to undertake the appropriate corrective works (whether or not the items are punch-list items) is Exhibit C-88 which is a letter prepared by CGI’s Windell F. Vizconde, checked by CGI’s Gary M. Garcia and noted by CGI’s Benjie Lipardo, addressed to the Quiambaos While Mrs. Quiambao appeared not to have given her conformity, this document from CGI is an admission by CGI of the deficiencies in the construction of the Building which needed to be corrected.

It appears that concrete samples taken from the basement, ground floor, mezzanine and 2nd floor of the Building were subjected to a concrete core test by Geotesting International, Inc., geotechnical and materials testing engineers. A report dated January 20, 1999 x x x showed x x x that (5) samples x x x failed the test. Sample S2 while it showed a comprehensive strength of 3147 psi, the corrective strength in psi was below the specified comprehensive strength of 3000 psi. CGI failed to produce evidence of similar tests during the construction of the Building although it is normal construction practice for the contractor to provide samples for concrete core tests.

Deformed reinforcing steel bar specimens from the building were subjected to physical tests. These tests were conducted at the Materials Testing Laboratory of the Department of Civil Engineering, College of Engineering, University of the Philippines. x x x There were 18 samples and x x x 8 failed the test although all of them passed the cold bend test. x x x CGI submitted Quality Test Certificates issued by Steel Asia certifying to the mechanical test results and chemical composition of the steel materials tested x x x. However, the samples were provided by the manufacturer, not by CGI, to Steel Asia, and there is no showing that the materials supplied by the manufacturer to CGI for the Building formed part of the steel materials, part of which was tested.

x x x

Regarding the additional columns at the basement and at the first floor to the roof deck of the Building, which effectively restricted the use of the basement as a parking area, and likewise reduced the area which could be used by the Quiambaos in the different floors of the Building,


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Engr. Roberto J. David admitted that these represented a design change which was made and implemented by CGI without the conformnity of the Claimants. The Contract specifically provided in Article II that "the CONTRACTOR shall submit to the OWNER all designs for the OWNER’S approval." This implies necessarily that all changes in the approved design shall likewise be submitted to the OWNER for approval. This change, in my view, is the single most serious breach of the Contract committed by CGI which justified the decision of the Claimants to terminate the Contract. x x x (T)here is no evidence to show that the Quiambaos approved the revision of the structural plans to provide for the construction of the additional columns. x x x

x x x Engr. Villasenor defended his structural design as adequate. He admitted that the revision of the plans which resulted in the construction of additional columns was in pursuance of the request of Engr. David to revise the structural plans to provide for a significant reduction of the cost of construction. When Engr. David was asked for the justification for the revision for the plans, he confirmed that he wanted to reduce the cost of construction. In any case, whether the cause of revision of the plans was the under-design of the foundation or for reasons of economy, it is CGI which is at fault. CGI prepared the structural plans and quoted the price for constructing the Building. The Quiambaos accepted both the plans and the price. If CGI made a mistake in designing the foundation or in estimating the cost of construction, it was at fault. It cannot correct that mistake by revising the plans and implementing the revisions without informing the Quiambaos and obtaining their unequivocal approval of such changes.

In addition, CGI admitted that no relocation survey was made by it prior to the construction of the Building. Consequently, a one-meter portion of the Building was constructed beyond the property line. In justification, Engr. Barba V. Santos declared that CGI made the layout of the proposed structure based on the existing fence. x x x (I)t is understood that a contractor, in constructing a building, must first conduct a relocation survey before construction precisely to avoid the situation which developed here, that the Building was not properly constructed within the owner’s property line. x x x This resulted in the under-utilization of the property, small as it is, and the exposure of the Quiambaos to substantial damages to the owner of the adjoining property encroached upon.

A third major contested issue concerned the construction of the cistern. x x x A cistern is an underground tank used to collect water for drinking purposes. The contentious points regarding the construction of the cistern are: first, that the cistern was designed to accumulate up to 10,000 gallons of water; as constructed, its capacity was less than the design capacity. Second, there is no internal partition separating the cistern from the sump pit. x x x

Considering that the cistern is a receptacle for the collection of drinking water, it is incomprehensible why the Respondents (herein petitioners), in the design and construction of the cistern, has (sic) not taken the necessary measures to make certain that the water in the cistern will be free from contamination. x x x


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Thus, granting the arguments of the Respondents (herein petitioners) that the observed defects in the Building could be corrected before turn-over and acceptance of the Building if CGI had been allowed to complete its construction, the construction of additional columns, the construction of the Building such that part of it is outside the property line established a sufficient legal and factual basis for the decision of the Quiambaos to terminate the Contract. The fact that five (5) of nine (9) the (sic) concrete samples subjected to a core test, and eight (8) of eighteen (18) deformed reinforcing steel bar specifics subjected to physical tests failed the tests and the under-design of the cistern was established after the Contract was terminated also served to confirm the justified suspicion of the Quiambaos that the Building was defective or was not constructed according to approved plans and specifications.10 (emphases supplied)

These are technical findings of fact made by expert witnesses and affirmed by the arbitrator. They were also affirmed by the Court of Appeals. We find no reason to revise them.

The second assigned error likewise involves a question of fact. It is contended that petitioner-spouses David cannot be held jointly and severally liable with petitioner CGI in the payment of the arbitral award as they are merely its corporate officers.

At first glance, the issue may appear to be a question of law as it would call for application of the law on the separate liability of a corporation. However, the law can be applied only after establishing a factual basis, i.e., whether petitioner-spouses as corporate officers were grossly negligent in ordering the revisions on the construction plan without the knowledge and consent of the respondent-spouses. On this issue, the Court of Appeals again affirmed the factual findings of the arbitrator, thus:

As a general rule, the officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. However, the personal liability of a corporate director, trustee or officer, along with corporation, may so validly attach when he assents to a patently unlawful act of the corporation or for bad faith or gross negligence in directing its affairs.

The following findings of public respondent (CIAC) would support its ruling in holding petitioners severally and jointly liable with the Corporation:

" x x x When asked whether the Building was underdesigned considering the poor quality of the soil, Engr. Villasenor defended his structural design as adequate. He admitted that the revision of the plans which resulted in the construction of additional columns was in pursuance of the request of Engr. David to revise the structural plans to provide for a significant reduction of the cost of construction. When Engr. David was asked for the justification for the revision of the plans, he confirmed that he wanted to reduce the cost of construction. x x x" (emphases supplied)11


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Clearly, the case at bar does not raise any genuine issue of law. We reiterate the rule that factual findings of construction arbitrators are final and conclusive and not reviewable by this Court on appeal, except when the petitioner proves affirmatively that: (1) the award was procured by corruption, fraud or other undue means; (2) there was evident partiality or corruption of the arbitrators or of any of them; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; (4) one or more of the arbitrators were disqualified to act as such under section nine of Republic Act No. 876 and willfully refrained from disclosing such disqualifications or of any other misbehavior by which the rights of any party have been materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter submitted to them was not made.12 Petitioners failed to show that any of these exceptions applies to the case at bar.

Finally, it bears to remind petitioners of this Court’s ruling in the 1993 case of Hi-Precision Steel Center, Inc. vs. Lim Kim Steel Builders, Inc.13 which emphasized the rationale for limiting appeal to legal questions in construction cases resolved through arbitration, thus:

x x x Consideration of the animating purpose of voluntary arbitration in general, and arbitration under the aegis of the CIAC in particular, requires us to apply rigorously the above principle embodied in Section 19 that the Arbitral Tribunal’s findings of fact shall be final and inappealable (sic).

Voluntary arbitration involves the reference of a dispute to an impartial body, the members of which are chosen by the parties themselves, which parties freely consent in advance to abide by the arbitral award issued after proceedings where both parties had the opportunity to be heard. The basic objective is to provide a speedy and inexpensive method of settling disputes by allowing the parties to avoid the formalities, delay, expense and aggravation which commonly accompany ordinary litigation, especially litigation which goes through the entire hierarchy of courts. Executive Order No. 1008 created an arbitration facility to which the construction industry in the Philippines can have recourse. The Executive Order was enacted to encourage the early and expeditious settlement of disputes in the construction industry, a public policy the implementation of which is necessary and important for the realization of the national development goals.

Aware of the objective of voluntary arbitration in the labor field, in the construction industry, and in other area for that matter, the Court will not assist one or the other or even both parties in any effort to subvert or defeat that objective for their private purposes. The Court will not review the factual findings of an arbitral tribunal upon the artful allegation that such body had "misapprehended facts" and will not pass upon issues which are, at bottom, issues of fact, no matter how cleverly disguised they might be as "legal questions." The parties here had recourse to arbitration and chose the arbitrators themselves; they must have had confidence in such arbitrators. The Court will not, therefore, permit the parties to relitigate before it the issues of facts previously presented and argued before the Arbitral Tribunal, save only where a clear


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showing is made that, in reaching its factual conclusions, the Arbitral Tribunal committed an error so egregious and hurtful to one party as to constitute a grave abuse of discretion resulting in lack or loss of jurisdiction. Prototypical examples would be factual conclusions of the Tribunal which resulted in deprivation of one or the other party of a fair opportunity to present its position before the Arbitral Tribunal, and an award obtained through fraud or the corruption of arbitrators. Any other more relaxed rule would result in setting at naught the basic objective of a voluntary arbitration and would reduce arbitration to a largely inutile institution. (emphases supplied)

IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. Costs against petitioners.

[G.R. No. 113907. April 20, 2001]MALAYANG SAMAHAN NG MGA MANGGAGAWA SA M. GREENFIELD (MSMG-UWP), , et al., , petitioners, vs. NLRC, et al. ,respondents.

Before us is petitioners motion for partial reconsideration of our decision dated February 28, 2000,[1] the dispositive portion of which reads:[2]

WHEREFORE, the petition is GRANTED; the decision of the National Labor Relations Commission in Case No. NCR-00-09-04199-89 is REVERSED and SET ASIDE; and the respondent company is hereby ordered to immediately reinstate the petitioners to their respective positions. Should reinstatement be not feasible, respondent company shall pay separation pay of one month salary for every year of service. Since petitioners were terminated without the requisite written notice at least 30 days prior to their termination, following the recent ruling in the case of Ruben Serrano vs. National Labor Relations Commission and Isetann Department Store, the respondent company is hereby ordered to pay full backwages to petitioner-employees while the Federation is also ordered to pay full backwages to petitioner-union officers who were dismissed upon its instigation. Since the dismissal of petitioners was without cause, backwages shall be computed from the time the herein petitioner employees and union officers were dismissed until their actual reinstatement.Should reinstatement be not feasible, their backwages shall be computed from the time petitioners were terminated until the finality of this decision. Costs against the respondent company.

Petitioners allege that this Court committed patent and palpable error in holding that the respondent company officials cannot be held personally liable for damages on account of employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents whereas the records clearly established that respondent company officers Saul Tawil, Carlos T. Javelosa and Renato C. Puangco have caused the hasty, arbitrary and unlawful dismissal of petitioners from work; that as top officials of the respondent company who handed down the decision dismissing the petitioners, they are responsible for acts of unfair labor practice; that these respondent corporate officers should not be considered as mere agents of the company but the wrongdoers. Petitioners further contend

http://sc.judiciary.gov.ph/jurisprudence/2001/apr2001/113907.htm#_edn2



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that while the case was pending before the public respondents, the respondent company, in the early part of February 1990, began removing its machineries and equipment from its plant located at Merville Park, Paranaque and began diverting jobs intended for the regular employees to its sub-contractor/satellite branches;[3] that the respondent company officials are also the officers and incorporators of these satellite companies as shown in their articles of incorporation and the general information sheet. They added that during their ocular inspection of the plant site of the respondent company, they found that the same is being used by other unnamed business entities also engaged in the manufacture of garments. Petitioners further claim that the respondent company no longer operates its plant site as M. Greenfield thus it will be very difficult for them to fully enforce and implement the courts decision. In their subsequent motion filed on the same day, petitioners also pray for the (A) inclusion of the names of employees listed in Annex D of the petition which they inadvertently omitted in the caption of the case.

In their Comment, the Solicitor General interposes no objection to petitioners prayer for the inclusion of omitted and similarly situated employees and the correction of employees names in the caption of the case.

On the other hand, private respondent company officials Carlos Javelosa and Remedios Caoleng, in their Comment, state that considering that petitioners admitted having knowledge of the fact that private respondent officers are also holding key positions in the alleged satellite companies, they should have presented the pertinent evidence with the public respondents; thus it is too late for petitioners to require this Court to admit and evaluate evidence not presented during the trial; that the supposed proof of satellite companies hardly constitute newly discovered evidence. Respondent officials interpose no objection to the inclusion of employees inadvertently excluded in the caption of the case but object to the inclusion of employees who were allegedly similarly situated for the reason that these employees had not been parties to the case, hence should not be granted any relief from the court.Respondent company failed to file its comment.[11]

Petitioners contention that respondent company officials should be made personally liable for damages on account of petitioners dismissal is not impressed with merit. 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.[12] The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. [13] True, solidary liabilities may at times be incurred but only when exceptional circumstances warrant such as, generally, in the following cases:[14]

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;







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(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons.[15]

(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.[16]

(3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation.[17]

(4) When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.[18]

In labor cases, particularly, the Court has held corporate directors and officers solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith.[19] Bad faith or negligence is a question of fact and is evidentiary. [20] It has been held that bad faith does not connote bad judgement or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.[21]

In the instant case, there is nothing substantial on record to show that respondent officers acted in patent bad faith or were guilty of gross negligence in terminating the services of petitioners so as to warrant personal liability. As held in Sunio vs. NLRC,[22]

We now come to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Directors Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one half (1/2) interest of said corporation, and his alleged arbitrary dismissal of private respondents.


It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should nor have been made personally answerable for the payment of private respondents back salaries.

Petitioners claim that the jobs intended for the respondent companys regular employees were diverted to its satellite companies where the respondent company officers are holding key positions is not substantiated and was raised for the first time in this motion for










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reconsideration. Even assuming that the respondent company officials are also officers and incorporators of the satellite companies, such circumstance does not in itself amount to fraud. The documents attached to petitioners motion for reconsideration show that these satellite companies[23] were established prior to the filing of petitioners complaint against private respondents with the Department of Labor and Employment on September 6, 1989 and that these corporations have different sets of incorporators aside from the respondent officers and are holding their principal offices at different locations. Substantial identity of incorporators between respondent company and these satellite companies does not necessarily imply fraud.[24] In such a case, respondent companys corporate personality remains inviolable.[25]

Although there were earlier decisions of this Court in labor cases where corporate officers were held to be personally liable for the payment of wages and other money claims to its employees, we find those rulings inapplicable to this case. In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana (KKM),[26] La Campana Coffee Factory, Inc. and La Campana Gaugau Packing were substantially owned by the same person. They had one office, one management, and a single payroll for both businesses. The laborers of the gaugau factory and the coffee factory were also interchangeable, i.e., the workers in one factory worked also in the other factory.

In Claparols vs. Court of Industrial Relations,[27] the Claparol Steel and Nail Plant which was ordered to pay its workers backwages, ceased operations on June 30, 1957 and was succeeded on the next day, July 1, 1957 by the Claparols Steel Corporation. Both corporations were substantially owned and controlled by the same person and there was no break or cessation in operations. Moreover, all the assets of the steel and nail plant were transferred to the new corporation.

Notably, in the above-mentioned cases, a new corporation was created, owned by the same family, engaged in the same business and operating in the same compound, a situation which is not obtaining in the instant case.

In AC Ransom Labor Union-CCLU vs. NLRC,[28] the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation can be held personally liable for non-payment of backwages for if the policy of the law were otherwise, the corporation employer would have devious ways for evading of back wages. This Court said:

In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of backwages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial Relations was promulgated against RANSOM.

Clearly, the situation in AC Ransom does not obtain in this case, where the alleged satellite companies were established even prior to the filing of petitioners complaint with the Department of Labor.








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Petitioners prayer for the inclusion of employees listed in Annex D whose names were admittedly inadvertently excluded in the caption of the case and for the correction of typographical errors of the employees names appearing in the caption, is well taken and is hereby granted. However, petitioners prayer for the inclusion of other employees allegedly similarly situated but whose names were not included either in Annex D or in the caption of the case must be denied. A judgment cannot bind persons who are not parties to the action.[29] It is elementary that strangers to a case are not bound by the judgment rendered by the court and such judgment is not available as an adjudication either against or in favor of such other person.[30] Petitioners failed to explain why these employees allegedly similarly situated were not included in the submitted list filed before us. Such inclusion would be tantamount to a substantial amendment which cannot be allowed at this late stage of the proceedings as it will definitely work to the prejudice and disadvantage of the private respondents.[31]

WHEREFORE, petitioners motion for reconsideration is partially granted so as to include the names of employees listed in Annex D which petitioners inadvertently omitted in the caption of this case.

[G.R. No. 125778. June 10, 2003]INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS and ASIA INDUSTRIES, INC., respondents.

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]





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The Agreement, as amended, provided that pending submission by SGV of FARMACORs 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 stockholders 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 respondents 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. Petitioners 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 respondents 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


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from the filing of the complaint until fully paid, the sum of P30,000.00 as attorneys fees and the costs of suit; and (b) dismissing the counterclaim.

SO ORDERED.

By Decision of January 25, 1996, the Court of Appeals affirmed the trial courts decision. Petitioners 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:

ITHE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER BEING ULTRA VIRES.IITHE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A CORPORATION.IIITHE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE RESPONDENT.IVTHE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY ATTORNEYS 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 respondents claim for refund upon petitioners 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 petitioners president is valid and binding. The case of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals19 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.


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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 apparent authority, 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


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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 prepared by 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]


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As to petitioners assigned error on the award of attorneys fees which, it argues, is bereft of factual, legal and equitable justification, this Court finds the same well-taken.

On the matter of attorneys fees, it is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsels fees are not to be awarded every time a party wins a suit. The power of the court to award attorneys 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 basis being 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 attorneys 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 attorneys fees in favor of private respondent is deleted. The decision is affirmed in other respects.

[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., respondentsSometime 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.

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, attorneys 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 Tans 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 attorneys fees.


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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 Tans 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 Banks 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 of P493,566.61 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, attorneys 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 attorneys fees in favor of the respondent Bank for being without basis.

The appellate court disbelieved petitioner Tans 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 Tans 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.


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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 courts 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 appellees 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


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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 Banks 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 Tans allegation that he was made to sign blank loan documents and that the phrase IN MY OFFICIAL/PERSONAL CAPACITY was superimposed by the respondent Banks employee despite petitioner Tans protestation. The Court is hard pressed to believe that a businessman of petitioner Tans 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


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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 Tans 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 Tans 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 Secretarys 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 P100,000.00 from any bank (Exhibits G-1 and G-2). Under these


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circumstances, the defendant corporation is liable for the transactions entered into by Tan on its behalf.[20]

Per its Secretarys 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 Tans 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 agents authority.[21]

In fine, there is no cogent reason to deviate from the CAs 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.

G.R. No. 160215 November 10, 2004HYDRO RESOURCES CONTRACTORS CORPORATION, petitioner, vs.NATIONAL IRRIGATION ADMINISTRATION, respondent.

In a competitive bidding conducted by the National Irrigation Administration (NIA) sometime in August 1978, Hydro Resources Contractors Corporation (Hydro) was awarded Contract MPI-C-25 involving the main civil work of the Magat River Multi-Purpose Project. The contract price for the work was pegged at P1,489,146,473.72 with the peso component thereof amounting to P1,041,884,766.99 and the US$ component valued at $60,657,992.37 at the exchange rate of P7.3735 to the dollar or P447,361,706.73.

On November 6, 1978, the parties signed Amendment No. 16 of the contract whereby NIA agreed to increase the foreign currency allocation for equipment financing from US$28,000,000.00 for the first and second years of the contract to US$38,000,000.00, to be made available in full during the first year of the contract to enable the contractor to purchase the needed equipment and spare parts, as approved by NIA, for the construction of the project. On April 9, 1980, the parties entered into a Memorandum of Agreement7 (MOA) whereby they agreed that Hydro may directly avail of the foreign currency component of the contract for the sole purpose of purchasing necessary spare parts and equipment for the project. This was made in order for the contractor to avoid further delays in the procurement of the said spare parts and equipment.


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A few months after the MOA was signed, NIA and Hydro entered into a Supplemental Memorandum of Agreement (Supplemental MOA) to include among the items to be financed out of the foreign currency portion of the Contract "construction materials, supplies and services as well as equipment and materials for incorporation in the permanent works of the Project."8

Work on the project progressed steadily until Hydro substantially completed the project in 1982 and the final acceptance was made by NIA on February 14, 1984.9

During the period of the execution of the contract, the foreign exchange value of the peso against the US dollar declined and steadily deteriorated. Whenever Hydro's availment of the foreign currency component exceeded the amount of the foreign currency payable to Hydro for a particular period, NIA charged interest in dollars based on the prevailing exchange rate instead of the fixed exchange rate of P7.3735 to the dollar. Yet when Hydro received payments from NIA in Philippine Pesos, NIA made deductions from Hydro's foreign currency component at the fixed exchange rate of P7.3735 to US$1.00 instead of the prevailing exchange rate.

Upon completion of the project, a final reconciliation of the total entitlement of Hydro to the foreign currency component of the contract was made. The result of this final reconciliation showed that the total entitlement of Hydro to the foreign currency component of the contract exceeded the amount of US dollars required by Hydro to repay the advances made by NIA for its account in the importation of new equipment, spare parts and tools. Hydro then requested a full and final payment due to the underpayment of the foreign exchange portion caused by price escalations and extra work orders. In 1983, NIA and Hydro prepared a joint computation denominated as the "MPI-C-2 Dollar Rate Differential on Foreign Component of Escalation."10 Based on said joint computation, Hydro was still entitled to a foreign exchange differential of US$1,353,771.79 equivalent to P10,898,391.17.

Hydro then presented its claim for said foreign exchange differential to NIA on August 12, 198311 but the latter refused to honor the same. Hydro made several12 demands to recover its claim until the same was turned down with finality by then NIA Administrator Federico N. Alday, Jr. on January 6, 1987.13

On December 7, 1994, Hydro filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC).14 In the said request, Hydro nominated six (6) arbitrators. The case was docketed as CIAC Case No. 18-94.

NIA filed its Answer with Compulsory Counterclaim15 raising laches, estoppel and lack of jurisdiction by CIAC as its special defenses. NIA also submitted its six (6) nominees to the panel of arbitrators. After appointment of the arbitrators, both parties agreed on the Terms of Reference16 as well as the issues submitted for arbitration.


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On March 13, 1995, NIA filed a Motion to Dismiss17 questioning CIAC's jurisdiction to take cognizance of the case. The latter, however, deferred resolution of the motion and set the case for hearing for the reception of evidence.18 NIA moved19 for reconsideration but the same was denied by CIAC in an Order dated April 25, 1995.20

Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of Appeals where the same was docketed as CA-G.R. SP No. 37180,21 which dismissed the petition in a Resolution dated June 28, 1996.22

NIA challenged the resolution of the Court of Appeals before this Court in a special civil action for certiorari, docketed as G.R. No. 129169.23

Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of Hydro.24 NIA filed a Petition for Review on Appeal before the Court of Appeals, which was docketed as CA-G.R. SP No. 44527.25

During the pendency of CA-G.R. SP No. 44527 before the Court of Appeals, this Court dismissed special civil action for certiorari docketed as G.R. No. 129169 on the ground that CIAC had jurisdiction over the dispute and directed the Court of Appeals to proceed with reasonable dispatch in the disposition of CA-G.R. SP No. 44527. NIA did not move for reconsideration of the said decision, hence, the same became final and executory on December 15, 1999.26

Thereafter, the Court of Appeals rendered the challenged decision in CA-G.R. SP No. 44527, reversing the judgment of the CIAC on the grounds that: (1) Hydro's claim has prescribed; (2) assuming that Hydro was entitled to its claim, the rate of exchange should be based on a fixed rate; (3) Hydro's claim is contrary to R.A. No. 529;27 (4) NIA's Certification of Non-Forum-Shopping was proper even if the same was signed only by counsel and not by NIA's authorized representative; and (5) NIA did not engage in forum-shopping.

Hydro's Motion for Reconsideration was denied in Resolution of September 24, 2003.


Addressing first the issue of prescription, the Court of Appeals, in ruling that Hydro's claim had prescribed, reasoned thus:

Nevertheless, We find good reason to apply the principle of prescription against HRCC. It is well to note that Section 25 of the General Conditions of the subject contract provides (CIAC Decision, p. 15, Rollo, p. 57):

Any controversy or dispute arising out of or relating to this Contract which cannot be resolved by mutual agreement shall be decided by the Administrator within thirty (30) calendar days


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from receipt of a written notice from Contractor and who shall furnish Contractor a written copy of this decision. Such decision shall be final and conclusive unless within thirty (30) calendar days from the date of receipt thereof, Contractor shall deliver to NIA a written notice addressed to the Administrator that he desires that the dispute be submitted to arbitration. Pending decision from arbitration, Contractor shall proceed diligently with the performance of the Contract and in accordance with the decision of the Administrator. (Emphasis and Underscoring Ours)

Both parties admit the existence of this provision in the Contract (Petition, p. 4; Comment, p. 16; Rollo, pp. 12 and 131). Apropos, the following matters are clear: (1) any controversy or dispute between the parties arising from the subject contract shall be governed by the provisions of the contract; (2) upon the failure to arrive at a mutual agreement, the contractor shall submit the dispute to the Administrator of NIA for determination; and (3) the decision of the Administrator shall become final and conclusive, unless within thirty (30) calendar days from the date of receipt thereof, the Contractor shall deliver to NIA a written notice addressed to the Administrator that he desires that the dispute be submitted for arbitration.

Prescinding from the foregoing matters, We find that the CIAC erred in granting HRCC's claim considering that the latter's right to make such demand had clearly prescribed. To begin with, on January 7, 1986, Cesar L. Tech (NIA's Administrator at the time) informed HRCC in writing that after a review of the additional points raised by the latter, NIA confirms its original recommendation not to allow the said claim (Annex "F"; Rollo, p. 81; CIAC Decision, p. 11; Rollo, p. 53). This should have propelled private respondent to notify and signify to NIA of intention to submit the dispute to arbitration pursuant to the provision of the contract. Yet, it did not. Instead it persisted to send several letters to NIA reiterating the reason for its rejected claim (CIAC Decision, p. 11; Rollo, p. 53).28

We disagree for the following reasons:

First, the appellate court clearly overlooked the fact that NIA, through then Administrator Fedrico N. Alday, Jr., denied "with finality" Hydro's claim only on January 6, 1987 in a letter bearing the same date29 which reads:

This refers to your letter dated November 7, 1986 requesting reconsideration on your claim for payment of the Dollar Rate Differential of Price Escalation in Contract No. MPI-C-2.

We have reviewed the relevant facts and issues as presented and the additional points raised in the abovementioned letter in the context of the Contract Documents and we find no strong and valid reason to reverse the earlier decision of NIA's previous management denying your claim. Therefore, we regret that we have to reiterate the earlier official stand of NIA under its letter dated January 7, 1986, that confirms the original recommendation which had earlier been presented in our 4th Indorsement dated February 5, 1985 to your office.


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In view hereof, we regret to say with finality that the claim cannot be given favorable consideration. (Emphasis and italics supplied)

Hydro received the above-mentioned letter on January 27, 1987.30 Pursuant to Section 25 of the Contract's General Conditions (GC-25), Hydro had thirty (30) days from receipt of said denial, or until February 26, 1987, within which to notify NIA of its desire to submit the dispute to arbitration.

On February 18, 1987, Hydro sent a letter31 to NIA, addressed to then NIA Administrator Federico N. Alday, Jr., manifesting its desire to submit the dispute to arbitration. The letter was received by NIA on February 19, 1987, which was within the thirty-day prescriptive period.

Moreover, a circumspect scrutiny of the wording of GC-25 with regard to the thirty-day prescriptive period shows that said proviso is intended to apply to disputes which arose during the actual construction of the project and not for controversies which occured after the project is completed. The rationale for such a stipulation was aptly explained thus by the CIAC in its Decision in CIAC Case No. 18-94:

In construction contracts, there is invariably a provision for interim settlement of disputes. The right to settle disputes is given to the owner or his representative, either an architect or engineer, designated as "owner's representative," only for the purpose of avoiding delay in the completion of the project. In this particular contract, that right was reserved to the NIA Administrator. The types of disputes contemplated were those which may have otherwise affected the progress of the work. It is very clear that this is the purpose of the limiting periods in this clause that the dispute shall be resolved by the Administrator within 30 days from receipt of a written notice from the Contractor and that the Contractor may submit to arbitration this dispute if it does not agree with the decision of the Administrator, and "Pending decision from arbitration, Contractor shall proceed diligently with the performance of the Contract and in accordance with the decision of the Administrator."

In this case, the dispute had arisen after completion of the Project. The reason for the 30-day limitation no longer applies, and we find no legal basis for applying it. Moreover, in Exhibit "B," NIA Administrator Cesar L. Tech had, instead of rendering an adverse decision, by signing the document with HRCC's Onofre B. Banson, implicitly approved the payment of the foreign exchange differential, but this payment could not be made because of the opinion of Auditor Saldua and later of the Commission on Audit.32

Second, as early as April 1983, Hydro and NIA, through its Administrator Cesar L. Tech, prepared the Joint Computation which shows that Hydro is entitled to the foreign currency differential.33 As correctly found by the CIAC, this computation constitutes a written acknowledgment of the debt by the debtor under Article 1155 of the Civil Code, which states:


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ART. 1155. The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. (Emphasis and italics supplied)

Instead of upholding the CIAC's findings on this point, the Court of Appeals ruled that Cesar L. Tech's act of signing the Joint Computation was an ultra vires act. This again is patent error. It must be noted that the Administrator is the highest officer of the NIA. Furthermore, Hydro has been dealing with NIA through its Administrator in all of its transactions with respect to the contract and subsequently the foreign currency differential claim. The NIA Administrator is empowered by the Contract to grant or deny foreign currency differential claims. It would be preposterous for the NIA Administrator to have the power of granting claims without the authority to verify the computation of such claims. Finally, the records of the case will show that NIA itself never disputed its Administrator's capacity to sign the Joint Computation because it knew that the Administrator, in fact, had such capacity.

Even assuming for the sake of argument that the Administrator had no authority to bind NIA, the latter is already estopped after repeatedly representing to Hydro that the Administrator had such authority. A corporation may be held in estoppel from denying as against third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority.34 Indeed –

. . . 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.". . .35

Third, NIA has clearly waived the prescriptive period when it continued to entertain Hydro's claim regarding new matters raised by the latter in its letters to NIA and then issuing rulings thereon. In this regard, Article 1112 of the Civil Code provides that:

ART. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future.

Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. (Emphasis and italics supplied)

Certainly, when a party has renounced a right acquired by prescription through its actions, it can no longer claim prescription as a defense.36


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Fourth, even assuming that NIA did not waive the thirty-day prescriptive period, it clearly waived the effects of such period when it actively participated in arbitration proceedings through the following acts:

a) On January 6, 1995, NIA voluntarily filed its written appearance, readily submitted its Answer and asserted its own Counterclaims;

b) In the Compliance which accompanied the Answer, NIA also submitted its six nominees to the Arbitral Tribunal to be constituted, among of which one was eventually appointed to the tribunal;

c) NIA also actively participated in the deliberations for and the formulation of the Terms of Reference during the preliminary conference set by CIAC; and

d) For the purpose of obviating the introduction of testimonial evidence on the authenticity and due execution of its documentary evidence, NIA even had examined, upon prior request to Hydro, all of the documents which the latter intended to present as evidentiary exhibits for the said arbitration case.

We now come to the issue of whether or not the provisions of R.A. No. 529, otherwise known as an Act To Assure Uniform Value to Philippine Coin And Currency, is applicable to Hydro's claim.

The Contract between NIA and Hydro is an internationally tendered contract considering that it was funded by the International Bank for Reconstruction and Development (IBRD). As a contract funded by an international organization, particularly one recognized by the Philippines,37 the contract is exempt from the provisions of R.A. No. 529. R.A. No. 4100 amended the provisions of R.A. 529 thus:

SECTION 1. Section one of Republic Act Numbered Five hundred and twenty-nine, entitled "An Act to Assure Uniform Value of Philippine Coin and Currency," is hereby amended to read as follows:

Sec. 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provisions purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions where the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are identifiable, as having emanated from the sources


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enumerated above; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transaction entered into between banks or between banks and individuals or juridical persons; (d) import-export and other international banking, financial investment and industrial transactions. With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provisions, in which bases the terms of the parties' agreement shall apply, every other domestic obligation heretofore or hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore and hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private.

SECTION 2. This Act shall take effect upon its approval. (Emphasis and italics supplied)

Even assuming ex gratia argumenti that R.A. No. 529 is applicable, it is still erroneous for the Court of Appeals to deny Hydro's claim because Section 1 of R.A. No. 529 states that only the stipulation requiring payment in foreign currency is void, but not the obligation to make payment. This can be gleaned from the provision that "every other domestic obligation heretofore or hereafter incurred" shall be "discharged upon payment in any coin and currency which at the time is legal tender for public and private debts." In Republic Resources and Development Corporation v. Court of Appeals,38 it was held:

. . . it is clear from Section 1 of R.A. No. 529 that what is declared null and void is the "provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby" and not the contract or agreement which contains such proscribed provision. (Emphasis supplied)

More succinctly, we held in San Buenaventura v. Court of Appeals39 that –

It is to be noted under the foregoing provision that while an agreement to pay an obligation in a currency other than Philippine currency is null and void as contrary to public policy, what the law specifically prohibits is payment in currency other than legal tender but does not defeat a creditor's claim for payment. A contrary rule would allow a person to profit or enrich himself inequitably at another's expense. (Emphasis supplied)


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It is thus erroneous for the Court of Appeals to disallow petitioner's claim for foreign currency differential because NIA's obligation should be converted to Philippine Pesos which was legal tender at the time.40

The next issue to be resolved is whether or not Hydro's claim should be computed at the fixed rate of exchange.

When the MOA41 and the Supplemental MOA42 were in effect, there were instances when the foreign currency availed of by Hydro exceeded the foreign currency payable to it for that particular Progress Payment. In instances like these, NIA actually charged Hydro interest in foreign currency computed at the prevailing exchange rate and not at the fixed rate. NIA now insists that the exchange rate should be computed according to the fixed rate and not the escalating rate it actually charged Hydro.

Suffice it to state that this flip-flopping stance of NIA of adopting and discarding positions to suit its convenience cannot be countenanced. A person who, by his deed or conduct has induced another to act in a particular manner, is barred from adopting an inconsistent position, attitude or course of conduct that thereby causes loss or injury to another.43 Indeed, the application of the principle of estoppel is proper and timely in heading off NIA's efforts at renouncing its previous acts to the prejudice of Hydro which had dealt with it honestly and in good faith.

. . . A principle of equity and natural justice, this is expressly adopted under Article 1431 of the Civil Code, and pronounced as one of the conclusive presumptions under Rule 131, Section 3(a) of the Rules of Court, as follows:

Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing to be true, and to act upon such a belief he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.

Petitioner, having performed affirmative acts upon which the respondents based their subsequent actions, cannot thereafter refute his acts or renege on the effects of the same, to the prejudice of the latter. To allow him to do so would be tantamount to conferring upon him the liberty to limit his liability at his whim and caprice, which is against the very principles of equity and natural justice…44

NIA is, therefore, estopped from invoking the contractual stipulation providing for the fixed rate to justify a lower computation than that claimed by Hydro. It cannot be allowed to hide behind the very provision which it itself continuously violated.45 An admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon.46 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them.47


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NIA was guilty of forum-shopping. Forum-shopping refers to the act of availing oneself of several judicial remedies in different courts, either simultaneously or successively, substantially founded on the same transaction and identical material facts and circumstances, raising basically the like issues either pending in, or already resolved by, some other court.48

It has been characterized as an act of malpractice that is prohibited and condemned as trifling with the courts and abusing their processes. It constitutes improper conduct which tends to degrade the administration of justice. It has also been described as deplorable because it adds to the congestion of the heavily burdened dockets of the courts.49 The test in determining the presence of this pernicious practice is whether in the two or more cases pending, there is identity of: (a) parties; (b) rights or causes of action; and (c) reliefs sought.50

Applying the foregoing yardstick to the instant case, it is clear that NIA violated the prohibition against forum-shopping. Besides filing CA-G.R. SP No. 44527 wherein the Court of Appeals' decision is the subject of appeal in this proceeding, NIA previously filed CA-G.R. SP No. 37180 and G.R. No. 129169 which is a special civil action for certiorari. In all three cases, the parties are invariably Hydro and NIA. In all three petitions, NIA raised practically the same issues51 and in all of them, NIA's prayer was the same: to nullify the proceedings commenced at the CIAC.

It must be pointed out in this regard that the first two petitions namely, CA-G.R. SP No. 37180 and G.R. No. 129169 are both original actions. Since NIA failed to file a petition for review on certiorari under Rule 45 of the Rules of Court challenging the decision of the appellate court in CA-G.R. SP No. 37180 dismissing its petition, it opted to file an original action for certiorari under Rule 65 with this Court where the same was docketed as G.R. No. 129169. For its failure to appeal the judgments in CA-G.R. SP No. 37180 and G.R. No. 129169, NIA is necessarily bound by the effects of those decisions. The filing of CA-G.R. SP No. 44527, which raises the issues already passed upon in both cases is a clear case of forum-shopping which merits outright dismissal.

The issue of whether or not the Certification of Non-Forum Shopping is valid despite that it was signed by NIA's counsel must be answered in the negative. Applicable is the ruling in Mariveles Shipyard Corp. v. Court of Appeals, et al.:52

It is settled that the requirement in the Rules that the certification of non-forum shopping should be executed and signed by the plaintiff or the principal means that counsel cannot sign said certification unless clothed with special authority to do so. The reason for this is that the plaintiff or principal knows better than anyone else whether a petition has previously been filed involving the same case or substantially the same issues. Hence, a certification signed by counsel alone is defective and constitutes a valid cause for dismissal of the petition. In the case of natural persons, the Rule requires the parties themselves to sign the certificate of non-forum shopping. However, in the case of the corporations, the physical act of signing may be performed, on behalf of the corporate entity, only by specifically authorized individuals for the


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simple reason that corporations, as artificial persons, cannot personally do the task themselves. . . It cannot be gainsaid that obedience to the requirements of procedural rule[s] is needed if we are to expect fair results therefrom. Utter disregard of the rules cannot justly be rationalized by harking on the policy of liberal construction. (Emphasis and italics supplied)

In this connection, the lawyer must be "specifically authorized" in order to validly sign the certification.53

In closing, we restate the rule that the courts will not interfere in matters which are addressed to the sound discretion of government agencies entrusted with the regulation of activities coming under the special technical knowledge and training of such agencies.54

An action by an administrative agency may be set aside by the judicial department only if there is an error of law, abuse of power, lack of jurisdiction or grave abuse of discretion clearly conflicting with the letter and spirit of the law.55 In the case at bar, there is no cogent reason to depart from the general rule because the action of the CIAC conforms rather than conflicts with the governing statutes and controlling case law on the matter.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 44527 dated October 29, 2002 and the Resolution dated September 24, 2003 are REVERSED and SET ASIDE. The Decision of the Construction Industry Arbitration Commission dated June 10, 1997 in CIAC Case No. 18-94 is REINSTATED.

[G.R. No. 152542. July 8, 2004]MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA, petitioner, vs. ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF APPEALS, respondents.

[G.R. No. 155472. July 8, 2004]ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ, petitioners, vs. HON. COURT OF APPEALS, MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA, and RAMON H. MONFORT, respondents.Before the Court are consolidated petitions for review of the decisions of the Court of Appeals in the complaints for forcible entry and replevin filed by Monfort Hermanos Agricultural Development Corporation (Corporation) and Ramon H. Monfort against the children, nephews,


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and nieces of its original incorporators (collectively known as the group of Antonio Monfort III).

The petition in G.R. No. 152542, assails the October 5, 2001 Decision[1] of the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which ruled that Ma. Antonia M. Salvatierra has no legal capacity to represent the Corporation in the forcible entry case docketed as Civil Case No. 534-C, before the Municipal Trial Court of Cadiz City. On the other hand, the petition in G.R. No. 155472, seeks to set aside the June 7, 2002 Decision[2] rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251, where it refused to address, on jurisdictional considerations, the issue of Ma. Antonia M. Salvatierras capacity to file a complaint for replevin on behalf of the Corporation in Civil Case No. 506-C before the Regional Trial Court of Cadiz City, Branch 60.

Monfort Hermanos Agricultural Development Corporation, a domestic private corporation, is the registered owner of a farm, fishpond and sugar cane plantation known as Haciendas San Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in Cadiz City.[3] It also owns one unit of motor vehicle and two units of tractors.[4] The same allowed Ramon H. Monfort, its Executive Vice President, to breed and maintain fighting cocks in his personal capacity at Hacienda San Antonio.[5]

In 1997, the group of Antonio Monfort III, through force and intimidation, allegedly took possession of the 4 Haciendas, the produce thereon and the motor vehicle and tractors, as well as the fighting cocks of Ramon H. Monfort.

In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its President, Ma. Antonia M. Salvatierra, and Ramon H. Monfort, in his personal capacity, filed against the group of Antonio Monfort III, a complaint[6] for delivery of motor vehicle, tractors and 378 fighting cocks, with prayer for injunction and damages, docketed as Civil Case No. 506-C, before the Regional Trial Court of Negros Occidental, Branch 60.

The group of Antonio Monfort III filed a motion to dismiss contending, inter alia, that Ma. Antonia M. Salvatierra has no capacity to sue on behalf of the Corporation because the March 31, 1997 Board Resolution[7] authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void as the purported Members of the Board who passed the same were not validly elected officers of the Corporation.

On May 4, 1998, the trial court denied the motion to dismiss.[8] The group of Antonio Monfort III filed a petition for certiorari with the Court of Appeals but the same was dismissed on June 7, 2002.[9] The Special Former Thirteenth Division of the appellate court did not resolve the validity of the March 31, 1997 Board Resolution and the election of the officers who signed it, ratiocinating that the determination of said question is within the competence of the trial court.


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The motion for reconsideration filed by the group of Antonio Monfort III was denied.[10] Hence, they instituted a petition for review with this Court, docketed as G.R. No. 155472.

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a complaint for forcible entry, preliminary mandatory injunction with temporary restraining order and damages against the group of Antonio Monfort III, before the Municipal Trial Court (MTC) of Cadiz City.[11] It contended that the latter through force and intimidation, unlawfully took possession of the 4 Haciendas and deprived the Corporation of the produce thereon.

In their answer,[12] the group of Antonio Monfort III alleged that they are possessing and controlling the Haciendas and harvesting the produce therein on behalf of the corporation and not for themselves. They likewise raised the affirmative defense of lack of legal capacity of Ma. Antonia M. Salvatierra to sue on behalf of the Corporation.

On February 18, 1998, the MTC of Cadiz City rendered a decision dismissing the complaint.[13] On appeal, the Regional Trial Court of Negros Occidental, Branch 60, reversed the Decision of the MTCC and remanded the case for further proceedings.[14]

Aggrieved, the group of Antonio Monfort III filed a petition for review with the Court of Appeals. On October 5, 2001, the Special Tenth Division set aside the judgment of the RTC and dismissed the complaint for forcible entry for lack of capacity of Ma. Antonia M. Salvatierra to represent the Corporation.[15] The motion for reconsideration filed by the latter was denied by the appellate court.[16]

Unfazed, the Corporation filed a petition for review with this Court, docketed as G.R. No. 152542 which was consolidated with G.R. No. 155472 per Resolution dated January 21, 2004.[17]

The focal issue in these consolidated petitions is whether or not Ma. Antonia M. Salvatierra has the legal capacity to sue on behalf of the Corporation.

The group of Antonio Monfort III claims that the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void because the purported Members of the Board who passed the same were not validly elected officers of the Corporation.

A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the


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board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors.[18]

Corollary thereto, corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after the election the names, nationalities and residences of the elected directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting business with domestic corporations properly informed of their organizational operational status, the SEC issued the following rules:

x x x x x x x x x

2. A General Information Sheet shall be filed with this Commission within thirty (30) days following the date of the annual stockholders meeting. No extension of said period shall be allowed, except for very justifiable reasons stated in writing by the President, Secretary, Treasurer or other officers, upon which the Commission may grant an extension for not more than ten (10) days.

2.A. Should a director, trustee or officer die, resign or in any manner, cease to hold office, the corporation shall report such fact to the Commission with fifteen (15) days after such death, resignation or cessation of office.

3. If for any justifiable reason, the annual meeting has to be postponed, the company should notify the Commission in writing of such postponement.

The General Information Sheet shall state, among others, the names of the elected directors and officers, together with their corresponding position title (Emphasis supplied)

In the instant case, the six signatories to the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation, were: Ma. Antonia M. Salvatierra, President; Ramon H. Monfort, Executive Vice President; Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M. Yusay; and Ester S. Monfort, Secretary.[19] However, the names of the last four (4) signatories to the said Board Resolution do not appear in the 1996 General Information Sheet submitted by the Corporation with the SEC. Under said General Information Sheet the composition of the Board is as follows:

1. Ma. Antonia M. Salvatierra (Chairman);2. Ramon H. Monfort (Member);3. Antonio H. Monfort, Jr., (Member);4. Joaquin H. Monfort (Member);5. Francisco H. Monfort (Member) and6. Jesus Antonio H. Monfort (Member).[20]


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There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly elected Members of the Board legally constituted to bring suit in behalf of the Corporation.[21]

In Premium Marble Resources, Inc. v. Court of Appeals,[22] the Court was confronted with the similar issue of capacity to sue of the officers of the corporation who filed a complaint for damages. In the said case, we sustained the dismissal of the complaint because it was not established that the Members of the Board who authorized the filing of the complaint were the lawfully elected officers of the corporation. Thus

The only issue in this case is whether or not the filing of the case for damages against private respondent was authorized by a duly constituted Board of Directors of the petitioner corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of the case against private respondent was authorized by the Board. On the other hand, the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did not authorize the filing in its behalf of any suit against the private respondent International Corporate Bank.

Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979 with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma. Silva.

However, it appears from the general information sheet and the Certification issued by the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of the board of directors of the Premium Marble Resources, Inc. were:

Alberto C. Nograles President/DirectorFernando D. Hilario Vice President/DirectorAugusto I. Galace TreasurerJose L.R. Reyes Secretary/DirectorPido E. Aguilar DirectorSaturnino G. Belen, Jr. Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981.


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We agree with the finding of public respondent Court of Appeals, that in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellants subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities & Exchange Commission.

By the express mandate of the Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities and residences of the directors, trustees and officers elected.

Sec. 26 of the Corporation Code provides, thus:

Sec. 26. Report of election of directors, trustees and officers. Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. xxx

Evidently, the objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers, of the nature of business, financial condition and operational status of the company together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporations financial resources and business responsibility.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been fully substantiated. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation.

In the case at bar, the fact that four of the six Members of the Board listed in the 1996 General Information Sheet[23] are already dead[24] at the time the March 31, 1997 Board Resolution was issued, does not automatically make the four signatories (i.e., Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said Board Resolution (whose name do not appear in the 1996 General Information Sheet) as among the incumbent Members of the Board. This is because it was not established that they were duly elected to replace the said deceased Board Members.

To correct the alleged error in the General Information Sheet, the retained accountant of the Corporation informed the SEC in its November 11, 1998 letter that the non-inclusion of the lawfully elected directors in the 1996 General Information Sheet was attributable to its


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oversight and not the fault of the Corporation.[25] This belated attempt, however, did not erase the doubt as to whether an election was indeed held. As previously stated, a corporation is mandated to inform the SEC of the names and the change in the composition of its officers and board of directors within 30 days after election if one was held, or 15 days after the death, resignation or cessation of office of any of its director, trustee or officer if any of them died, resigned or in any manner, ceased to hold office. This, the Corporation failed to do. The alleged election of the directors and officers who signed the March 31, 1997 Board Resolution was held on October 16, 1996, but the SEC was informed thereof more than two years later, or on November 11, 1998. The 4 Directors appearing in the 1996 General Information Sheet died between the years 1984 1987,[26] but the records do not show if such demise was reported to the SEC.

What further militates against the purported election of those who signed the March 31, 1997 Board Resolution was the belated submission of the alleged Minutes of the October 16, 1996 meeting where the questioned officers were elected. The issue of legal capacity of Ma. Antonia M. Salvatierra was raised before the lower court by the group of Antonio Monfort III as early as 1997, but the Minutes of said October 16, 1996 meeting was presented by the Corporation only in its September 29, 1999 Comment before the Court of Appeals.[27] Moreover, the Corporation failed to prove that the same October 16, 1996 Minutes was submitted to the SEC. In fact, the 1997 General Information Sheet[28] submitted by the Corporation does not reflect the names of the 4 Directors claimed to be elected on October 16, 1996.

Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to prove that four of those who authorized her to represent the Corporation were the lawfully elected Members of the Board of the Corporation. As such, they cannot confer valid authority for her to sue on behalf of the corporation.

The Court notes that the complaint in Civil Case No. 506-C, for replevin before the Regional Trial Court of Negros Occidental, Branch 60, has 2 causes of action, i.e., unlawful detention of the Corporations motor vehicle and tractors, and the unlawful detention of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon sought redress of the latter cause of action in his personal capacity, the dismissal of the complaint for lack of capacity to sue on behalf of the corporation should be limited only to the corporations cause of action for delivery of motor vehicle and tractors. In view, however, of the demise of Ramon on June 25, 1999,[29] substitution by his heirs is proper.

WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542 is DENIED. The October 5, 2001 Decision of the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which set aside the August 14, 1998 Decision of the Regional Trial Court of Negros Occidental, Branch 60 in Civil Case No. 822, is AFFIRMED.

In G.R. No. 155472, the petition is GRANTED and the June 7, 2002 Decision rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251,


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dismissing the petition filed by the group of Antonio Monfort III, is REVERSED and SET ASIDE.

The complaint for forcible entry docketed as Civil Case No. 822 before the Municipal Trial Court of Cadiz City is DISMISSED. In Civil Case No. 506-C with the Regional Trial Court of Negros Occidental, Branch 60, the action for delivery of personal property filed by Monfort Hermanos Agricultural Development Corporation is likewise DISMISSED. With respect to the action filed by Ramon H. Monfort for the delivery of 387 fighting cocks, the Regional Trial Court of Negros Occidental, Branch 60, is ordered to effect the corresponding substitution of parties.

G.R. No. 146667 January 23, 2007JOHN F. McLEOD, Petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.), PATRICIO L. LIM, and ERIC HU, Respondents.

The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of Appeals, are as follows:

On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and sick leave benefits, non-payment of unused airline tickets, holiday pay, underpayment of salary and 13th month pay, moral and exemplary damages, attorney’s fees plus interest against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu.

In his Position Paper, complainant alleged that he is an expert in textile manufacturing process; that as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc. (UTEX); that he was promoted to Senior Manager and worked for UTEX till 1980 under its President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent Filsyn having controlling interest; that complainant was absorbed by Peggy Mills as its Vice President and Plant Manager of the plant at Sta. Rosa, Laguna; that at the time of his retirement complainant was receiving P60,000.00 monthly with vacation and sick leave benefits; 13th month pay, holiday pay and two round trip business class tickets on a Manila-London-Manila itinerary every three years which is convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation and leave credits and requested complainant to wait as it was short of funds but the same remain unpaid at present; that complainant is entitled to such benefit as per CBA provision (Annex "A"); that respondents likewise failed to pay complainant’s holiday pay up to the present; that complainant is entitled to such benefits as per CBA provision (Annex "B"); that in 1989 the plant union staged a strike and in 1993 was found


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guilty of staging an illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business class plane tickets on a Manila-London-Manila itinerary but this benefit not (sic) its monetary equivalent was not given; that on August 1990 the respondents reduced complainant’s monthly salary of P60,000.00 by P9,900.00 till November 1993 or a period of 39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement (Annex "D") and this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President; that complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far Eastern consulted with complainant on technical aspects of reoperation of the plant as per correspondence (Annexes "D-1" and "D-2"); that when complainant reached and applied retirement age at the end of 1993, he was only given a reduced 13th month pay of P44,183.63, leaving a balance of P15,816.87; that thereafter the owners of Far Eastern Textiles decided for cessation of operations of Sta. Rosa Textiles; that on two occasions, complainant wrote letters (Annexes "E-1" to "E-2") to Patricio Lim requesting for his retirement and other benefits; that in the last quarter of 1994 respondents offered complainant compromise settlement of only P300,000.00 which complainant rejected; that again complainant wrote a letter (Annex "F") reiterating his demand for full payment of all benefits and to no avail, hence this complaint; and that he is entitled to all his money claims pursuant to law.

On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the corporation still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation which was established in April 1992 but still remains non-operational at present; that complainant was hired as consultant by Sta. Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate legal entities and have no employer relationship with complainant; that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice President and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting in closure of operations due to irreversible losses as per Notice (Annex "1"); that complainant was relied upon to settle the labor problem but due to his lack of attention and absence the strike continued resulting in closure of the company; and losses to Sta. Rosa which acquired its assets as per their financial statements (Annexes "2" and "3"); that the attendance records of complainant from April 1992 to November 1993 (Annexes "4" and "5") show that he was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the total amount of P36,757.00 against complainant; that complainant’s monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy Mills, does not have a retirement program; that whatever amount complainant is entitled should be offset with the counterclaims; that complainant worked only


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for 12 years from 1980 to 1992; that complainant was only hired as a consultant and not an employee by Sta. Rosa Textile; that complainant’s attendance record of absence and two hours daily work during the period of the strike wipes out any vacation/sick leave he may have accumulated; that there is no basis for complainant’s claim of two (2) business class airline tickets; that complainant’s pay already included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he is not entitled to moral and exemplary damages and attorney’s fees.

In his Reply, complainant alleged that all respondents being one and the same entities are solidarily liable for all salaries and benefits and complainant is entitled to; that all respondents have the same address at 12/F B.A. Lepanto Building, Makati City; that their counsel holds office in the same address; that all respondents have the same offices and key personnel such as Patricio Lim and Eric Hu; that respondents’ Position Paper is verified by Marialen C. Corpuz who knows all the corporate officers of all respondents; that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate fraud and confuse legitimate issues; that complainant never accepted the change in his position from Vice-President and Plant Manger to consultant and it is incumbent upon respondents to prove that he was only a consultant; that the Deed of Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took over the assets of Peggy Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that complainant never resigned from his job but applied for retirement as per letters (Annexes "E-1", "E-2" and "F"); that documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that the closure of Peggy Mills cannot be the fault of complainant; that the strike was staged on the issue of CBA negotiations which is not part of the usual duties and responsibilities as Plant Manager; that complainant is a British national and is prohibited by law in engaging in union activities; that as per Resolution (Annex "3") of the NLRC in the proper case, complainant testified in favor of management; that the alleged attendance record of complainant was lifted from the logbook of a security agency and is hearsay evidence; that in the other attendance record it shows that complainant was reporting daily and even on Saturdays; that his limited hours was due to the strike and cessation of operations; that as plant manager complainant was on call 24 hours a day; that respondents must pay complainant the unpaid portion of his salaries and his retirement benefits that cash voucher No. 17015 (Annex "K") shows that complainant drew the monthly salary of P60,000.00 which was reduced to P50,495.00 in August 1990 and therefore without the consent of complainant; that complainant was assured that he will be paid the deduction as soon as the company improved its financial standing but this assurance was never fulfilled; that Patricio Lim promised complainant his retirement pay as per the latter’s letters (Annexes "E-1", "E-2" and "F"); that the law itself provides for retirement benefits; that Patricio Lim by way of Memorandum (Annex "M") approved vacation and sick leave benefits of 22 days per year effective 1986; that Peggy Mills required monthly paid employees to sign an acknowledgement that their monthly compensation includes holiday pay; that complainant was not made to sign this undertaking precisely because he is entitled to holiday pay over and above his monthly pay; that the company paid for complainant’s two (2) round trip tickets to London in 1983 and 1986 as reflected in the


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complainant’s passport (Annex "N"); that respondents claim that complainant is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that complainant is entitled to moral and exemplary damages and attorney’s fees; that all doubts must be resolved in favor of complainant; and that complainant reserved the right to file perjury cases against those concerned.

In their Reply, respondents alleged that except for Peggy Mills, the other respondents are not proper persons in interest due to the lack of employer-employee relationship between them and complainant; that undersigned counsel does not represent Peggy Mills, Inc.

In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on February 10, 1991 as per Board Minutes (Annex "A"); that on August 19, 1987, the workers staged an illegal strike causing cessation of operations on July 21, 1992; that respondent filed a Notice of Closure with the DOLE (Annex "B"); that all employees were given separation pay except for complainant whose task was extended to December 31, 1992 to wind up the affairs of the company as per vouchers (Annexes "C" and "C-1"); that respondent offered complainant his retirement benefits under RA 7641 but complainant refused; that the regular salaries of complainant from closure up to December 31, 1992 have offset whatever vacation and sick leaves he accumulated; that his claim for unused plane tickets from 1989 to 1992 has no policy basis, the company’s formula of employees monthly rate x 314 days over 12 months already included holiday pay; that complainant’s unpaid portion of the 13th month pay in 1993 has no basis because he was only an employee up to December 31, 1992; that the 13th month pay was based on his last salary; and that complainant is not entitled to damages.5

On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive portion:

WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable for complainant’s money claims as adjudicated above and computed below as follows:

Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta. Rosa Textiles, Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The NLRC rendered its decision on 29 December 1998, thus:

WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a new one is entered ORDERING respondent Peggy Mills, Inc. to pay complainant his retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate of P50,495.00 a month.

All other claims are DISMISSED for lack of merit.

SO ORDERED.7


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John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its Resolution of 30 June 1999.8 McLeod thus filed a petition for certiorari before the Court of Appeals assailing the decision and resolution of the NLRC.9

The Ruling of the Court of Appeals

On 15 June 2000, the Court of Appeals rendered judgment as follows:

WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with the MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy Mills, Inc., to pay the following amounts to petitioner John F. McLeod:

The Court of Appeals rejected McLeod’s theory that all respondent corporations are the same corporate entity which should be held solidarily liable for the payment of his monetary claims.

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same address; (2) all were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano holds office at respondent corporations’ address; and (4) all respondent corporations have common officers and key personnel, would not justify the application of the doctrine of piercing the veil of corporate fiction.

The Court of Appeals held that there should be clear and convincing evidence that SRTI, FETMI, and Filsyn were being used as alter ego, adjunct or business conduit for the sole benefit of Peggy Mills, Inc. (PMI), otherwise, said corporations should be treated as distinct and separate from each other.

The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn show that it has 10 incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael Maningas, and Benigno Zialcita, Jr.

The Court of Appeals pointed out that PMI and Filsyn have only two interlocking incorporators and directors, namely, Patricio and Carlos Palanca, Jr.

Reiterating the ruling of this Court in Laguio v. NLRC,11 the Court of Appeals held that mere substantial identity of the incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction.


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The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment with Lease, it was clear that SRTI did not assume the liabilities PMI incurred before the execution of the contract.

The Court of Appeals held that McLeod failed to substantiate his claim that all respondent corporations should be treated as one corporate

entity. The Court of Appeals thus upheld the NLRC’s finding that no employer-employee relationship existed between McLeod and respondent corporations except PMI.

The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from any liability, there being no proof of malice or bad faith on his part. The Court of Appeals, however, ruled that McLeod was entitled to recover from PMI and Patricio, the company’s Chairman and President.

The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMI’s financial obligation to McLeod. The Court of Appeals stated that, on several occasions, despite his approval, Patricio refused and ignored to pay McLeod’s retirement benefits. The Court of Appeals stated that the delay lasted for one year prompting McLeod to initiate legal action. The Court of Appeals stated that although PMI offered to pay McLeod his retirement benefits, this offer for P300,000 was still below the "floor limits" provided by law. The Court of Appeals held that an employee could demand payment of retirement benefits as a matter of right.

The Court of Appeals stated that considering that PMI was no longer in operation, its "officer should be held liable for acting on behalf of the corporation."

The Court of Appeals also ruled that since PMI did not have a retirement program providing for retirement benefits of its employees, Article 287 of the Labor Code must be followed. The Court of Appeals thus upheld the NLRC’s finding that McLeod was entitled to retirement pay equivalent to 22.5 days for every year of service from 1980 to 1992 based on a salary rate of P50,495 a month.

The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave and holiday pay because as Vice President and Plant Manager, McLeod is a managerial employee who, under Article 82 of the Labor Code, is not entitled to these benefits.

The Court of Appeals stated that for McLeod to be entitled to payment of service incentive leave and holidays, there must be an agreement to that effect between him and his employer.

Moreover, the Court of Appeals rejected McLeod’s argument that since PMI paid for his two round-trip tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline tickets." The Court of Appeals stated that the fact that PMI granted McLeod "free transport to


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and from Manila and London for the year 1983 and 1986 does not ipso facto characterize it as regular that would establish a prevailing company policy."

The Court of Appeals also denied McLeod’s claims for underpayment of salaries and his 13th month pay for the year 1994. The Court of Appeals upheld the NLRC’s ruling that it could be deduced from McLeod’s own narration of facts that he agreed to the reduction of his compensation from P60,000 to P50,495 in August 1990 to November 1993.

The Court of Appeals found the award of moral damages for P50,000 in order because of the "stubborn refusal" of PMI and Patricio to respect McLeod’s valid claims.

The Court of Appeals also ruled that attorney’s fees equivalent to 10% of the total award should be given to McLeod under Article 2208, paragraph 2 of the Civil Code.12


The IssuesMcLeod submits the following issues for our consideration:1. Whether the challenged Decision and Resolution of the 14th Division of the Court of Appeals promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R. SP No. 55130 are in accord with law and jurisprudence;2. Whether an employer-employee relationship exists between the private respondents and the petitioner for purposes of determining employer liability to the petitioner;3. Whether the private respondents may avoid their financial obligations to the petitioner by invoking the veil of corporate fiction;4. Whether petitioner is entitled to the relief he seeks against the private respondents;5. Whether the ruling of [this] Court in Special Police and Watchman Association (PLUM) Federation v. National Labor Relations Commission cited by the Office of the Solicitor General is applicable to the case of petitioner; and6. Whether the appeal taken by the private respondents from the Decision of the labor arbiter meets the mandatory requirements recited in the Labor Code of the Philippines, as amended.13

The Court’s Ruling

The petition must fail.

McLeod asserts that the Court of Appeals should not have upheld the NLRC’s findings that he was a managerial employee of PMI from 20 June 1980 to 31 December 1992, and then a consultant of SRTI up to 30 November 1993. McLeod asserts that if only for this "brazen assumption," the Court of Appeals should not have sustained the NLRC’s ruling that his cause of action was only against PMI.

These assertions do not deserve serious consideration.


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Records disclose that McLeod was an employee only of PMI.14 PMI hired McLeod as its acting Vice President and General Manager on 20 June 1980.15 PMI confirmed McLeod’s appointment as Vice President/Plant Manager in the Special Meeting of its Board of Directors on 10 February 1981.16 McLeod himself testified during the hearing before the Labor Arbiter that his "regular employment" was with PMI.17

When PMI’s rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI incurred serious business losses.18 This prompted PMI to stop permanently plant operations and to send a notice of closure to the Department of Labor and Employment on 21 July 1992.19

PMI informed its employees, including McLeod, of the closure.20 PMI paid its employees, including managerial employees, except McLeod, their unpaid wages, sick leave, vacation leave, prorated 13th month pay, and separation pay. Under the compromise agreement between PMI and its employees, the employer-employee relationship between them ended on 25 November 1992.21

Records also disclose that PMI extended McLeod’s service up to 31 December 1992 "to wind up some affairs" of the company.22 McLeod testified on cross-examination that he received his last salary from PMI in December 1992.23

It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31 December 1992.

However, McLeod claims that after FETMI purchased PMI in January 1993, he "continued to work at the same plant with the same responsibilities" until 30 November 1993. McLeod claims that FETMI merely renamed PMI as SRTI. McLeod asserts that it was for this reason that when he reached the retirement age in 1993, he asked all the respondents for the payment of his benefits.24

These assertions deserve scant consideration.

What took place between PMI and SRTI was dation in payment with lease. Pertinent portions of the contract that PMI and SRTI executed on 15 June 1992 read:

WHEREAS, PMI is indebted to the Development Bank of the Philippines ("DBP") and as security for such debts (the "Obligations") has mortgaged its real properties covered by TCT Nos. T-38647, T-37136, and T-37135, together with all machineries and improvements found thereat, a complete listing of which is hereto attached as Annex "A" (the "Assets");

WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the Obligations, including the Assets, to the Asset Privatization Trust ("APT") and the latter has received payment for the Obligations from PMI, under APT’s Direct Debt Buy-Out ("DDBO")


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program thereby causing APT to completely discharge and cancel the mortgage in the Assets and to release the titles of the Assets back to PMI;

WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00) (the "Advances") to enable PMI to consummate the DDBO with APT, with SRTC subrogating APT as PMI’s creditor thereby;

WHEREAS, in payment to SRTC for PMI’s liability, PMI has agreed to transfer all its rights, title and interests in the Assets by way of a dation in payment to SRTC, provided that simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated hereunder;

x x x x

NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and conditions hereinafter set forth, the parties hereby agree as follows:

1. CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00), PMI hereby cedes, conveys and transfers to SRTC all of its rights, title and interest in and to the Assets by way of a dation in payment.25 (Emphasis supplied)

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently enters into the transaction to escape liability for those debts.26

None of the foregoing exceptions is present in this case.

Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P210,000,000. We are not convinced that PMI fraudulently transferred these assets to escape its liability for any of its debts. PMI had already paid its employees, except McLeod, their money claims.

There was also no merger or consolidation of PMI and SRTI.

Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two or more corporations by which their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations.


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Merger, on the other hand, is a union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business.

The parties to a merger or consolidation are called constituent corporations. In consolidation, all the constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation acquires all their properties, rights and franchises and their stockholders usually become its stockholders.

The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the creditors have consented or not to such merger or consolidation.27

In the present case, there is no showing that the subject dation in payment involved any corporate merger or consolidation. Neither is there any showing of those indicative factors that SRTI is a mere instrumentality of PMI.

Moreover, SRTI did not expressly or impliedly agree to assume any of PMI’s debts. Pertinent portions of the subject Deed of Dation in Payment with Lease provide, thus:

2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the following:

x x x x

(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any liability for claims of PMI’s creditors, laborers, and workers and for physical injury or injury to property arising from PMI’s custody, possession, care, repairs, maintenance, use or operation of the Assets except ordinary wear and tear;28 (Emphasis supplied)

Also, McLeod did not present any evidence to show the alleged renaming of "Peggy Mills, Inc." to "Sta. Rosa Textiles, Inc."

Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity.

Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped operations.29 On the other hand, McLeod asserts that he was respondent corporations’ employee from 1980 to 30 November 1993.30 However, McLeod failed to present any proof of employer-employee relationship between him and Filsyn, SRTI, or FETMI. McLeod testified,


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McLeod could have presented evidence to support his allegation of employer-employee relationship between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or employment contracts, payrolls, organization charts, SSS registration, personnel list, as well as testimony of co-employees, may serve as evidence of employee status.33

It is a basic rule in evidence that parties must prove their affirmative allegations. While technical rules are not strictly followed in the NLRC, this does not mean that the rules on proving allegations are entirely ignored. Bare allegations are not enough. They must be supported by substantial evidence at the very least.34

However, McLeod claims that "for purposes of determining employer liability, all private respondents are one and the same employer" because: (1) they have the same address; (2) they are all engaged in the same business; and (3) they have interlocking directors and officers.35

This assertion is untenable.

A corporation is an artificial being invested by law with a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected.36

While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime,37 or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.38

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed.39

Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate veil.

Respondent corporations may be engaged in the same business as that of PMI, but this fact alone is not enough reason to pierce the veil of corporate fiction.40

In Indophil Textile Mill Workers Union v. Calica,41 the Court ruled, thus:

In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent Company. While we do not discount the possibility of


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the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.42 (Emphasis supplied)

Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas, Makati City,43 can be explained by the two companies’ stipulation in their Deed of Dation in Payment with Lease that "simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated hereunder."44

As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg., Paseo de Roxas, Makati City,45 while FETMI held office at 18F, Tun Nan Commercial Building, 333 Tun Hwa South Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did not have the same address as that of PMI.

That respondent corporations have interlocking incorporators, directors, and officers is of no moment.

The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr.47 While Patricio was Director and Board Chairman of Filsyn, SRTI, and PMI,48 he was never an officer of FETMI.

Eric Hu, on the other hand, was Director of Filsyn and SRTI.49 He was never an officer of PMI.

Marialen C. Corpuz, Filsyn’s Finance Officer,50 testified on cross-examination that (1) among all of Filsyn’s officers, only she was the one involved in the management of PMI; (2) only she and Patricio were the common officers between Filsyn and PMI; and (3) Filsyn and PMI are "two separate companies."51

Apolinario L. Posio, PMI’s Chief Accountant, testified that "SRTI is a different corporation from PMI."52

At any rate, the existence of interlocking incorporators, directors, and officers is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations.53

In Del Rosario v. NLRC,54 the Court ruled that substantial identity of the incorporators of corporations does not necessarily imply fraud.


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In light of the foregoing, and there being no proof of employer-employee relationship between McLeod and respondent corporations and Eric Hu, McLeod’s cause of action is only against his former employer, PMI.

On Patricio’s personal liability, it is settled that in the absence of malice, bad faith, or specific provision of law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.55

To reiterate, 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 rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities.56

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are 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) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action.57

Considering that McLeod failed to prove any of the foregoing exceptions in the present case, McLeod cannot hold Patricio solidarily liable with PMI.

The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad faith is a question of fact and is evidentiary. Bad faith does not connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means breach of a known duty through some ill motive or interest. It partakes of the nature of fraud.58

In the present case, there is nothing substantial on record to show that Patricio acted in bad faith in terminating McLeod’s services to warrant Patricio’s personal liability. PMI had no other choice but to stop plant operations. The work stoppage therefore was by necessity. The company could no longer continue with its plant operations because of the serious business losses that it had suffered. The mere fact that Patricio was president and director of PMI is not a ground to conclude that he should be held solidarily liable with PMI for McLeod’s money claims.

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,59 which the Court of Appeals cited, does not apply to this case. We quote pertinent portions of the ruling, thus:

(a) Article 265 of the Labor Code, in part, expressly provides:


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"Any worker whose employment has been terminated as a consequence of an unlawful lockout shall be entitled to reinstatement with full backwages."

Article 273 of the Code provides that:

"Any person violating any of the provisions of Article 265 of this Code shall be punished by a fine of not exceeding five hundred pesos and/or imprisonment for not less than one (1) day nor more than six (6) months."

(b) How can the foregoing provisions be implemented when the employer is a corporation? The answer is found in Article 212 (c) of the Labor Code which provides:

"(c) ‘Employer’ includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer.".

The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of (the) employer" RANSOM. The corporation, only in the technical sense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-payment of back wages. That is the policy of the law.

x x x x

(c) If the policy of the law were otherwise, the corporation employer can have devious ways for evading payment of back wages. In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial Relations was promulgated against RANSOM.60 (Emphasis supplied)

Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case. In Santos v. NLRC,61 the Court held, thus:

It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable


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for nonpayment of backwages for "(i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of backwages." In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court considered the President of the corporation as such officer. The case was cited in Chua vs. NLRC in holding personally liable the vice-president of the company, being the highest and most ranking official of the corporation next to the President who was dismissed for the latter’s claim for unpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction personal liability on the part of the company officer. In A.C. Ransom, the corporate entity was a family corporation and execution against it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The doctrine of "piercing the veil of corporate fiction" was thus clearly appropriate. Chua likewise involved another family corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers by the other.

The basic rule is still that which can be deduced from the Court’s pronouncement in Sunio vs. National Labor Relations Commission; thus:

We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director’s Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (½) interest of said corporation, and his alleged arbitrary dismissal of private respondents.


It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents’ back salaries.62 (Emphasis supplied)

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend


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crime. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. Neither Article 212(c) nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable for the debts of the corporation. As this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation:63

We concur with the CA that these two respondents are not liable. Section 31 of the Corporation Code (Batas Pambansa Blg. 68) provides:

"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith ... shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation, its stockholders or other persons.

The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable negligence, or that he acted outside the scope of his authority as company president. The unilateral termination of the Contract during the existence of the TRO was indeed contemptible – for which MPC should have merely been cited for contempt of court at the most – and a preliminary injunction would have then stopped work by the second contractor. Besides, there is no showing that the unilateral termination of the Contract was null and void.64

McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay. Article 82, Title I, Book Three of the Labor Code, on Working Conditions and Rest Periods, provides:

Coverage. ─ The provisions of this title shall apply to employees in all establishments and undertakings whether for profit or not, but not to government employees, managerial employees, field personnel, members of the family of the employer who are dependent on him for support, domestic helpers, persons in the personal service of another, and workers who are paid by results as determined by the Secretary of Labor in appropriate regulations.

As used herein, "managerial employees" refer to those whose primary duty consists of the management of the establishment in which they are employed or of a department or subdivision thereof, and to other officers or members of the managerial staff. (Emphasis supplied)

As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation leave and sick leave only if he and PMI had agreed on it. The payment of vacation leave and


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sick leave depends on the policy of the employer or the agreement between the employer and employee.65 In the present case, there is no showing that McLeod and PMI had an agreement concerning payment of these benefits.

McLeod’s assertion of underpayment of his 13th month pay in December 1993 is unavailing.66 As already stated, PMI stopped plant operations in 1992. McLeod himself testified that he received his last salary from PMI in December 1992. After the termination of the employer-employee relationship between McLeod and PMI, SRTI hired McLeod as consultant and not as employee. Since McLeod was no longer an employee, he was not entitled to the 13th month pay.67 Besides, there is no evidence on record that McLeod indeed received his alleged "reduced 13th month pay of P44,183.63" in December 1993.68

Also unavailing is McLeod’s claim that he was entitled to the "unpaid monetary equivalent of unused plane tickets for the period covering 1989 to 1992 in the amount of P279,300.00."69 PMI has no company policy granting its officers and employees expenses for trips abroad.70 That at one time PMI reimbursed McLeod for his and his wife’s plane tickets in a vacation to London71 could not be deemed as an established practice considering that it happened only once. To be considered a "regular practice," the giving of the benefits should have been done over a long period, and must be shown to have been consistent and deliberate.72

In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co., Inc.,73 the Court held that for a bonus to be enforceable, the employer must have promised it, and the parties must have expressly agreed upon it, or it must have had a fixed amount and had been a long and regular practice on the part of the employer.

In the present case, there is no showing that PMI ever promised McLeod that it would continue to grant him the benefit in question. Neither is there any proof that PMI and McLeod had expressly agreed upon the giving of that benefit.

McLeod’s reliance on Annex M74 can hardly carry the day for him. Annex M, which is McLeod’s letter addressed to "Philip Lim, VP Administration," merely contains McLeod’s proposals for the grant of some benefits to supervisory and confidential employees. Contrary to McLeod’s allegation, Patricio did not sign the letter. Hence, the letter does not embody any agreement between McLeod and the management that would entitle McLeod to his money claims.

Neither can McLeod’s assertions find support in Annex U.75 Annex U is the Agreement which McLeod and Universal Textile Mills, Inc. executed in 1959. The Agreement merely contains the renewal of the service agreement which the parties signed in 1956.

McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced without his consent.


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McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be reduced. McLeod said that Philip told him that "they were short in finances; that it would be repaid."76 Were McLeod not amenable to that reduction in salary, he could have immediately resigned from his work in PMI.

McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod testified that PMI was not able to operate from August 1989 to 1992 because of the strike. Even before 1989, as Vice President of PMI, McLeod was aware that the company had incurred "huge loans from DBP."77 As it happened, McLeod continued to work with PMI. We find it pertinent to quote some portions of Apolinario Posio’s testimony

Since the last salary that McLeod received from PMI was P50,495, that amount should be the basis in computing his retirement benefits. McLeod must be credited only with his service to PMI as it had a juridical personality separate and distinct from that of the other respondent corporations.

Since PMI has no retirement plan,80 we apply Section 5, Rule II of the Rules Implementing the New Retirement Law which provides:

5.1 In the absence of an applicable agreement or retirement plan, an employee who retires pursuant to the Act shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.

5.2 Components of One-half (1/2) Month Salary. ─ For the purpose of determining the minimum retirement pay due an employee under this Rule, the term "one-half month salary" shall include all of the following:

(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x

With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a retirement pay equivalent to ½ month salary for every year of service based on his latest salary rate of P50,495 a month.

There is no basis for the award of moral damages.

Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive.81 From the records of the case, the Court finds no ultimate facts to support a conclusion of bad faith on the part of PMI.


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Records disclose that PMI had long offered to pay McLeod his money claims. In their Comment, respondents assert that they offered to pay McLeod the sum of P840,000, as "separation benefits, and not P300,000, if only to buy peace and to forestall any complaint" that McLeod may initiate before the NLRC. McLeod admitted at the hearing before the Labor Arbiter that PMI has made this offer ─

A During that period in time, while the petition in this case was ongoing, we already filed a case at that period of time, sir. There was a discussion. To the best of my knowledge, they are willing to settle for P840,000.00 and based on what the Attorney told me, I refused to accept because I believe that my position was not in anyway due to a compromise situation to the benefits I am entitled to.83

Hence, the awards for exemplary damages and attorney’s fees are not proper in the present case.84

That respondent corporations, in their appeal to the NLRC, did not serve a copy of their memorandum of appeal upon PMI is of no moment. Section 3(a), Rule VI of the NLRC New Rules of Procedure provides:

Requisites for Perfection of Appeal. ─ (a) The appeal shall be filed within the reglementary period as provided in Section 1 of this Rule; shall be under oath with proof of payment of the required appeal fee and the posting of a cash or surety bond as provided in Section 5 of this Rule; shall be accompanied by a memorandum of appeal x x x and proof of service on the other party of such appeal. (Emphasis supplied)

The "other party" mentioned in the Rule obviously refers to the adverse party, in this case, McLeod. Besides, Section 3, Rule VI of the Rules which requires, among others, proof of service of the memorandum of appeal on the other party, is merely a rundown of the contents of the required memorandum of appeal to be submitted by the appellant. These are not jurisdictional requirements.85

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No. 55130, with the following MODIFICATIONS: (a) the retirement pay of John F. McLeod should be computed at ½ month salary for every year of service for 12 years based on his salary rate of P50,495 a month; (b) Patricio L. Lim is absolved from personal liability; and (c) the awards for moral and exemplary damages and attorney’s fees are deleted. No pronouncement as to costs.


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G.R. No. 147590 April 2, 2007ANTONIO C. CARAG, Petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION, ISABEL G. PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter, NAFLU, and MARIVELES APPAREL CORPORATION LABOR UNION, Respondents.

National Federation of Labor Unions (NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU) (collectively, complainants), on behalf of all of MAC's rank and file employees, filed a complaint against MAC for illegal dismissal brought about by its illegal closure of business. In their complaint dated 12 August 1993, complainants alleged the following:

2. Complainant NAFLU is the sole and exclusive bargaining agent representing all rank and file employees of [MAC]. That there is an existing valid Collective Bargaining Agreement (CBA) executed by the parties and that at the time of the cause of action herein below discussed happened there was no labor dispute between the Union and Management except cases pending in courts filed by one against the other.

3. That on July 8, 1993, without notice of any kind filed in accordance with pertinent provisions of the Labor Code, [MAC], for reasons known only by herself [sic] ceased operations with the intention of completely closing its shop or factory. Such intentions [sic] was manifested in a letter, allegedly claimed by [MAC] as its notice filed only on the same day that the operations closed.

4. That at the time of closure, employees who have rendered one to two weeks work were not paid their corresponding salaries/wages, which remain unpaid until time [sic] of this writing.

5. That there are other benefits than those above-mentioned which have been unpaid by [MAC] at the time it decided to cease operations, benefits gained by the workers both by and under the CBA and by operations [sic] of law.

6. That the closure made by [MAC] in the manner and style done is perce [sic] illegal, and had caused tremendous prejudice to all of the employees, who suffered both mental and financial anguish and who in view thereof merits [sic] award of all damages (actual, exemplary and moral), [illegible] to set [an] example to firms who in the future will [illegible] the idea of simply prematurely closing without complying [with] the basic requirement of Notice of Closure.6 (Emphasis supplied)

Upon receipt of the records of the case, Arbiter Ortiguerra summoned the parties to explore options for possible settlement. The non-appearance of respondents prompted Arbiter Ortiguerra to declare the case submitted for resolution "based on the extant pleadings."


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In their position paper dated 3 January 1994, complainants moved to implead Carag and David, as follows:

x x x x In the present case, it is unfortunate for respondents that the records and evidence clearly demonstrate that the individual complainants are entitled to the reliefs prayed for in their complaint. However, any favorable judgment the Honorable Labor Arbiter may render in favor of herein complainants will go to naught should the Office fails [sic] to appreciate the glaring fact that the respondents [sic] corporation is no longer existing as it suddenly stopped business operation since [sic] 8 July 1993. Under this given circumstance, the complainants have no option left but to implead Atty. ANTONIO CARAG, in his official capacity as Chairman of the Board along with MR. ARMANDO DAVID as President. Both are also owners of the respondent corporation with office address at 10th Floor, Gamon Centre, Alfaro Street, Salcedo Village[,] Makati[,] Metro Manila although they may be collectively served with summons and other legal processes through counsel of record Atty. Joshua Pastores of 8th Floor, Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro Manila. This inclusion of individual respondents as party respondents in the present case is to guarantee the satisfaction of any judgment award on the basis of Article 212(c) of the Philippine Labor Code, as amended, which says:

"Employer includes any person acting in the interest of an employer, directly or indirectly. It does not, however, include any labor organization or any of its officers or agents except when acting as employer."

The provision was culled from Section 2, Republic Act 602, the Minimum Wage Act. If the employer is an artificial person, it must have an officer who can be presumed to be the employer, being "the person acting in the interest of the employer." The corporation is the employer, only in the technical sense. (A.C. Ransom Labor Union CCLU VS. NLRC, G.R. 69494, June 10, 1986). Where the employer-corporation, AS IN THE PRESENT CASE, is no longer existing and unable to satisfy the judgment in favor of the employee, the officer should be held liable for acting on behalf of the corporation. (Gudez vs. NLRC, G.R. 83023, March 22, 1990). Also in the recent celebrated case of Camelcraft Corporation vs. NLRC, G.R. 90634-35 (June 6, 1990), Carmen contends that she is not liable for the acts of the company, assuming it had [acted] illegally, because Camelcraft in a distinct and separate entity with a legal personality of its own. She claims that she is only an agent of the company carrying out the decisions of its board of directors, "We do not agree," said the Supreme Court. "She is, in fact and legal effect, the corporation, being not only its president and general manager but also its owner." The responsible officer of an employer can be held personally liable not to say even criminally liable for nonpayment of backwages. This is the policy of the law. If it were otherwise, corporate employers would have devious ways to evade paying backwages. (A.C. Ransom Labor Union-CCLU V. NLRC, G.R. 69494, June 10, 1986). If no definite proof exists as to who is the responsible officer, the president of the corporation who can be deemed to be its chief operation officer shall be presumed to be the responsible officer. In Republic Act 602,


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for example, criminal responsibility is with the "manager" or in his default, the person acting as such (Ibid.)7 (Emphasis supplied)

Atty. Joshua L. Pastores (Atty. Pastores), as counsel for respondents, submitted a position paper dated 21 February 1994 and stated that complainants should not have impleaded Carag and David because MAC is actually owned by a consortium of banks. Carag and David own shares in MAC only to qualify them to serve as MAC's officers.

Without any further proceedings, Arbiter Ortiguerra rendered her Decision dated 17 June 1994 granting the motion to implead Carag and David. In the same Decision, Arbiter Ortiguerra declared Carag and David solidarily liable with MAC to complainants.

The Ruling of the Labor Arbiter

In her Decision dated 17 June 1994, Arbiter Ortiguerra ruled as follows:

This is a complaint for illegal dismissal brought about by the illegal closure and cessation of business filed by NAFLU and Mariveles Apparel Corporation Labor Union for and in behalf of all rank and file employees against respondents Mariveles Apparel Corporation, Antonio Carag and Armando David [who are] its owners, Chairman of the Board and President, respectively.

This case was originally raffled to the sala of Labor Arbiter Adolfo V. Creencia. When the latter went on sick leave, his cases were re-raffled and the instant case was assigned to the sala of the undersigned. Upon receipt of the record of the case, the parties were summoned for them to be able to explore options for settlement. The respondents however did not appear prompting this Office to submit the case for resolution based on extant pleadings, thus this decision.

The complainants claim that on July 8, 1993 without notice of any kind the company ceased its operation as a prelude to a final closing of the firm. The complainants allege that up to the present the company has remained closed.

The complainants bewail that at the time of the closure, employees who have rendered one to two weeks of work were not given their salaries and the same have remained unpaid.

The complainants aver that respondent company prior to its closure did not even bother to serve written notice to employees and to the Department of Labor and Employment at least one month before the intended date of closure. The respondents did not even establish that its closure was done in good faith. Moreover, the respondents did not pay the affected employees separation pay, the amount of which is provided in the existing Collective Bargaining Agreement between the complainants and the respondents.

The complainants pray that they be allowed to implead Atty. Antonio Carag and Mr. Armando David[,] owners and responsible officer[s] of respondent company to assure the satisfaction of


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the judgment, should a decision favorable to them be rendered. In support of their claims, the complainants invoked the ruling laid down by the Supreme Court in the case of A.C. Ransom Labor Union CCLU vs. NLRC, G.R. No. 69494, June 10, 1986 where it was held that [a] corporate officer can be held liable for acting on behalf of the corporation when the latter is no longer in existence and there are valid claims of workers that must be satisfied.

The complainants pray for the declaration of the illegality of the closure of respondents' business. Consequently, their reinstatement must be ordered and their backwages must be paid. Should reinstatement be not feasible, the complainants pray that they be paid their separation pay in accordance with the computation provided for in the CBA. Computations of separation pay due to individual complainants were adduced in evidence (Annexes "C" to "C-44", Complainants' Position Paper). The complainants also pray for the award to them of attorney's fee[s].

The respondents on the other hand by way of controversion maintain that the present complaint was filed prematurely. The respondents deny having totally closed and insist that respondent company is only on a temporary shut-down occasioned by the pending labor unrest. There being no permanent closure any claim for separation pay must not be given due course.

Respondents opposed the impleader of Atty. Antonio C. Carag and Mr. Armando David saying that they are not the owners of Mariveles Apparel Corporation and they are only minority stockholders holding qualifying shares. Piercing the veil of corporate fiction cannot be done in the present case for such remedy can only be availed of in case of closed or family owned corporations.

Respondents pray for the dismissal of the present complaint and the denial of complainants' motion to implead Atty. Antonio C. Carag and Mr. Armando David as party respondents.

This Office is now called upon to resolve the following issues:

1. Whether or not the respondents are guilty of illegal closure;

2. Whether or not individual respondents could be held personally liable; and

3. Whether or not the complainants are entitled to an award of attorney's fees.

After a judicious and impartial consideration of the record, this Office is of the firm belief that the complainants must prevail.

The respondents described the cessation of operations in its premises as a temporary shut-down. While such posturing may have been initially true, it is not so anymore. The cessation of operations has clearly exceeded the six months period fixed in Article 286 of the Labor Code. The temporary shutdown has ripened into a closure or cessation of operations for causes not due


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to serious business losses or financial reverses. Consequently, the respondents must pay the displaced employees separation pay in accordance with the computation prescribed in the CBA, to wit, one month pay for every year of service. It must be stressed that respondents did not controvert the verity of the CBA provided computation.

The complainants claim that Atty. Antonio Carag and Mr. Armando David should be held jointly and severally liable with respondent corporation. This bid is premised on the belief that the impleader of the aforesaid officers will guarantee payment of whatever may be adjudged in complainants' favor by virtue of this case. It is a basic principle in law that corporations have personality distinct and separate from the stockholders. This concept is known as corporate fiction. Normally, officers acting for and in behalf of a corporation are not held personally liable for the obligation of the corporation. In instances where corporate officers dismissed employees in bad faith or wantonly violate labor standard laws or when the company had already ceased operations and there is no way by which a judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with the company. This Office after a careful consideration of the factual backdrop of the case is inclined to grant complainants' prayer for the impleader of Atty. Antonio Carag and Mr. Armando David, to assure that valid claims of employees would not be defeated by the closure of respondent company.

The complainants pray for the award to them of moral and exemplary damages, suffice it to state that they failed to establish their entitlement to aforesaid reliefs when they did not adduce persuasive evidence on the matter.

The claim for attorney's fee[s] will be as it is hereby resolved in complainants' favor. As a consequence of the illegal closure of respondent company, the complainants were compelled to litigate to secure benefits due them under pertinent laws. For this purpose, they secured the services of a counsel to assist them in the course of the litigation. It is but just and proper to order the respondents who are responsible for the closure and subsequent filing of the case to pay attorney's fee[s].

WHEREFORE, premises considered, judgment is hereby rendered declaring respondents jointly and severally guilty of illegal closure and they are hereby ordered as follows:

1. To pay complainants separation pay computed on the basis of one (1) month for every year of service, a fraction of six (6) months to be considered as one (1) year in the total amount of P49,101,621.00; and

2. To pay complainants attorney's fee in an amount equivalent to 10% of the judgment award.

The claims for moral, actual and exemplary damages are dismissed for lack of evidence.

SO ORDERED.8 (Emphasis supplied)


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MAC, Carag, and David, through Atty. Pastores, filed their Memorandum before the NLRC on 26 August 1994. Carag, through a separate counsel, filed an appeal dated 30 August 1994 before the NLRC. Carag reiterated the arguments in respondents' position paper filed before Arbiter Ortiguerra, stating that:

2.1 While Atty. Antonio C. Carag is the Chairman of the Board of MAC and Mr. Armando David is the President, they are not the owners of MAC;

2.2 MAC is owned by a consortium of banks, as stockholders, and Atty. Antonio C. Carag and Mr. Armando David are only minority stockholders of the corporation, owning only qualifying shares;

2.3 MAC is not a family[-]owned corporation, that in case of a close [sic] corporation, piercing the corporate veil its [sic] possible to hold the stockholders liable for the corporation's liabilities;

2.4 MAC is a corporation with a distinct and separate personality from that of the stockholders; piercing the corporate veil to hold the stockholders liable for corporate liabilities is only true [for] close corporations (family corporations); this is not the prevailing situation in MAC;

2.5 Atty. Antonio Carag and Mr. Armando David are professional managers and the extension of shares to them are just qualifying shares to enable them to occupy subject position.9

Respondents also filed separate motions to reduce bond.

The Ruling of the NLRC

In a Resolution promulgated on 5 January 1995, the NLRC Third Division denied the motions to reduce bond. The NLRC stated that to grant a reduction of bond on the ground that the appeal is meritorious would be tantamount to ruling on the merits of the appeal. The dispositive portion of the Resolution of the NLRC Third Division reads, thus:

PREMISES CONSIDERED, Motions to Reduce Bond for both respondents are hereby DISMISSED for lack of merit. Respondents are directed to post cash or surety bond in the amount of forty eight million one hundred one thousand six hundred twenty one pesos (P48,101,621.00) within an unextendible period of fifteen (15) days from receipt hereof.

No further Motions for Reconsideration shall be entertained.

SO ORDERED.10


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Respondents filed separate petitions for certiorari before this Court under Rule 65 of the 1964 Rules of Court. Carag filed his petition, docketed as G.R. No. 118820, on 13 February 1995. In the meantime, we granted MAC's prayer for the issuance of a temporary restraining order to enjoin the NLRC from enforcing Arbiter Ortiguerra's Decision. On 31 May 1995, we granted complainants' motion for consolidation of G.R. No. 118820 with G.R. No. 118839 (MAC v. NLRC, et al.) and G.R. No. 118880 (David v. Arbiter Ortiguerra, et al.). On 12 July 1999, after all the parties had filed their memoranda, we referred the consolidated cases to the appellate court in accordance with our decision in St. Martin Funeral Home v. NLRC.11 Respondents filed separate petitions before the appellate court.

The Ruling of the Appellate Court

On 29 February 2000, the appellate court issued a joint decision on the separate petitions. The appellate court identified two issues as essential: (1) whether Arbiter Ortiguerra properly held Carag and David, in their capacities as corporate officers, jointly and severally liable with MAC for the money claims of the employees; and (2) whether the NLRC abused its discretion in denying the separate motions to reduce bond filed by MAC and Carag.

The appellate court held that the absence of a formal hearing before the Labor Arbiter is not a cause for Carag and David to impute grave abuse of discretion. The appellate court found that Carag and David, as the most ranking officers of MAC, had a direct hand at the time in the illegal dismissal of MAC's employees. The failure of Carag and David to observe the notice requirement in closing the company shows malice and bad faith, which justifies their solidary liability with MAC. The appellate court also found that the circumstances of the present case do not warrant a reduction of the appeal bond. Thus:

IN VIEW WHEREOF, the petitions are DISMISSED. The decision of Labor Arbiter Isabel Panganiban-Ortiguerra dated June 17, 1994, and the Resolution dated January 5, 1995, issued by the National Labor Relations Commission are hereby AFFIRMED. As a consequence of dismissal, the temporary restraining order issued on March 2, 1995, by the Third Division of the Supreme Court is LIFTED. Costs against petitioners.

SO ORDERED.12 (Emphasis in the original)

The appellate court denied respondents' separate motions for reconsideration.13

In a resolution dated 20 June 2001, this Court's First Division denied the petition for Carag's failure to show sufficiently that the appellate court committed any reversible error to warrant the exercise of our discretionary appellate jurisdiction. Carag filed a motion for reconsideration of our resolution denying his petition. In a resolution dated 13 August 2001, this Court's First Division denied Carag's reconsideration with finality.


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Despite our 13 August 2001 resolution, Carag filed a second motion for reconsideration with an omnibus motion for leave to file a second motion for reconsideration. This Court's First Division referred the motion to the Court En Banc. In a resolution dated 25 June 2002, the Court En Banc resolved to grant the omnibus motion for leave to file a second motion for reconsideration, reinstated the petition, and required respondents to comment on the petition. On 25 November 2003, the Court En Banc resolved to suspend the rules to allow the second motion for reconsideration. This Court's First Division referred the petition to the Court En Banc on 14 July 2004, and the Court En Banc accepted the referral on 15 March 2005.

The Issues

Carag questions the appellate court's decision of 29 February 2000 by raising the following issues before this Court:

1. Has petitioner Carag's right to due process been blatantly violated by holding him personally liable for over P50 million of the corporation's liability, merely as board chairman and solely on the basis of the motion to implead him in midstream of the proceedings as additional respondent, without affording him the right to present evidence and in violation of the accepted procedure prescribed by Rule V of the NLRC Rules of Procedure, as to render the ruling null and void?

2. Assuming, arguendo, that he had been accorded due process, is the decision holding him solidarily liable supported by evidence when the only pleadings (not evidence) before the Labor Arbiter and that of the Court of Appeals are the labor union's motion to implead him as respondent and his opposition thereto, without position papers, without evidence submitted, and without hearing on the issue of personal liability, and even when bad faith or malice, as the only legal basis for personal liability, was expressly found absent and wanting by [the] Labor Arbiter, as to render said decision null and void?

3. Did the NLRC commit grave abuse of discretion in denying petitioner's motion to reduce appeal bond?14

The Ruling of the CourtWe find the petition meritorious.On Denial of Due Process to Carag and DavidCarag asserts that Arbiter Ortiguerra rendered her Decision of 17 June 1994 without issuing summons on him, without requiring him to submit his position paper, without setting any hearing, without giving him notice to present his evidence, and without informing him that the case had been submitted for decision - in violation of Sections 2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V of The New Rules of Procedure of the NLRC.20

It is clear from the narration in Arbiter Ortiguerra's Decision that she only summoned complainants and MAC, and not Carag, to a conference for possible settlement. In her Decision,


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Arbiter Ortiguerra stated that she scheduled the conference "upon receipt of the record of the case." At the time of the conference, complainants had not yet submitted their position paper which contained the motion to implead Carag. Complainants could not have submitted their position paper before the conference since procedurally the Arbiter directs the submission of position papers only after the conference.21 Complainants submitted their position paper only on 10 January 1994, five months after filing the complaint. In short, at the time of the conference, Carag was not yet a party to the case. Thus, Arbiter Ortiguerra could not have possibly summoned Carag to the conference.

Carag vigorously denied receiving summons to the conference, and complainants have not produced any order of Arbiter Ortiguerra summoning Carag to the conference. A thorough search of the records of this case fails to show any order of Arbiter Ortiguerra directing Carag to attend the conference. Clearly, Arbiter Ortiguerra did not summon Carag to the conference.

When MAC failed to appear at the conference, Arbiter Ortiguerra declared the case submitted for resolution. In her Decision, Arbiter Ortiguerra granted complainants' motion to implead Carag and at the same time, in the same Decision, found Carag personally liable for the debts of MAC consisting of P49,101,621 in separation pay to complainants. Arbiter Ortiguerra never issued summons to Carag, never called him to a conference for possible settlement, never required him to submit a position paper, never set the case for hearing, never notified him to present his evidence, and never informed him that the case was submitted for decision - all in violation of Sections 2, 3, 4, 5(b), and 11(c) of Rule V of The New Rules of Procedure of the NLRC.

Indisputably, there was utter absence of due process to Carag at the arbitration level. The procedure adopted by Arbiter Ortiguerra completely prevented Carag from explaining his side and presenting his evidence. This alone renders Arbiter Ortiguerra's Decision a nullity insofar as Carag is concerned. While labor arbiters are not required to conduct a formal hearing or trial, they have no license to dispense with the basic requirements of due process such as affording respondents the opportunity to be heard. In Habana v. NLRC,22 we held:

The sole issue to be resolved is whether private respondents OMANFIL and HYUNDAI were denied due process when the Labor Arbiter decided the case solely on the basis of the position paper and supporting documents submitted in evidence by Habana and De Guzman.

We rule in the affirmative. The manner in which this case was decided by the Labor Arbiter left much to be desired in terms of respect for the right of private respondents to due process -

First, there was only one conciliatory conference held in this case. This was on 10 May 1996. During the conference, the parties did not discuss at all the possibility of amicable settlement due to petitioner's stubborn insistence that private respondents be declared in default.


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Second, the parties agreed to submit their respective motions - petitioner's motion to declare respondents in default and private respondents' motion for bill of particulars - for the consideration of the Labor Arbiter. The Labor Arbitration Associate, one Ms. Gloria Vivar, then informed the parties that they would be notified of the action of the Labor Arbiter on the pending motions.

x x x

Third, since the conference on 10 May 1996 no order or notice as to what action was taken by the Labor Arbiter in disposing the pending motions was ever received by private respondents. They were not declared in default by the Labor Arbiter nor was petitioner required to submit a bill of particulars.

Fourth, neither was there any order or notice requiring private respondents to file their position paper, nor an order informing the parties that the case was already submitted for decision. What private respondents received was the assailed decision adverse to them.

It is clear from the foregoing that there was an utter absence of opportunity to be heard at the arbitration level, as the procedure adopted by the Labor Arbiter virtually prevented private respondents from explaining matters fully and presenting their side of the controversy. They had no chance whatsoever to at least acquaint the Labor Arbiter with whatever defenses they might have to the charge that they illegally dismissed petitioner. In fact, private respondents presented their position paper and documentary evidence only for the first time on appeal to the NLRC.

The essence of due process is that a party be afforded a reasonable opportunity to be heard and to submit any evidence he may have in support of his defense. Where, as in this case, sufficient opportunity to be heard either through oral arguments or position paper and other pleadings is not accorded a party to a case, there is undoubtedly a denial of due process.

It is true that Labor Arbiters are not bound by strict rules of evidence and of procedure. The manner by which Arbiters dispose of cases before them is concededly a matter of discretion. However, that discretion must be exercised regularly, legally and within the confines of due process. They are mandated to use every reasonable means to ascertain the facts of each case, speedily, objectively and without regard to technicalities of law or procedure, all in the interest of justice and for the purpose of accuracy and correctness in adjudicating the monetary awards.

In this case, Carag was in a far worse situation. Here, Carag was not issued summons, not accorded a conciliatory conference, not ordered to submit a position paper, not accorded a hearing, not given an opportunity to present his evidence, and not notified that the case was submitted for resolution. Thus, we hold that Arbiter Ortiguerra's Decision is void as against Carag for utter absence of due process. It was error for the NLRC and the Court of Appeals to uphold Arbiter Ortiguerra's decision as against Carag.


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On the Liability of Directors for Corporate Debts

This case also raises this issue: when is a director personally liable for the debts of the corporation? The rule is that a director is not personally liable for the debts of the corporation, which has a separate legal personality of its own. Section 31 of the Corporation Code lays down the exceptions to the rule, as follows:

Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

x x x x

Section 31 makes a director personally liable for corporate debts if he wilfully and knowingly votes for or assents to patently unlawful acts of the corporation. Section 31 also makes a director personally liable if he is guilty of gross negligence or bad faith in directing the affairs of the corporation.

Complainants did not allege in their complaint that Carag wilfully and knowingly voted for or assented to any patently unlawful act of MAC. Complainants did not present any evidence showing that Carag wilfully and knowingly voted for or assented to any patently unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her Decision.

Complainants did not also allege that Carag is guilty of gross negligence or bad faith in directing the affairs of MAC. Complainants did not present any evidence showing that Carag is guilty of gross negligence or bad faith in directing the affairs of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her Decision.

Arbiter Ortiguerra stated in her Decision that:

In instances where corporate officers dismissed employees in bad faith or wantonly violate labor standard laws or when the company had already ceased operations and there is no way by which a judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with the company.23

After stating what she believed is the law on the matter, Arbiter Ortiguerra stopped there and did not make any finding that Carag is guilty of bad faith or of wanton violation of labor standard laws. Arbiter Ortiguerra did not specify what act of bad faith Carag committed, or what particular labor standard laws he violated.


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To hold a director personally liable for debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must be established clearly and convincingly.24 Bad faith is never presumed.25 Bad faith does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means breach of a known duty through some ill motive or interest. Bad faith partakes of the nature of fraud.26 In Businessday Information Systems and Services, Inc. v. NLRC,27 we held:

There is merit in the contention of petitioner Raul Locsin that the complaint against him should be dismissed. A corporate officer is not personally liable for the money claims of discharged corporate employees unless he acted with evident malice and bad faith in terminating their employment. There is no evidence in this case that Locsin acted in bad faith or with malice in carrying out the retrenchment and eventual closure of the company (Garcia vs. NLRC, 153 SCRA 640), hence, he may not be held personally and solidarily liable with the company for the satisfaction of the judgment in favor of the retrenched employees.

Neither does bad faith arise automatically just because a corporation fails to comply with the notice requirement of labor laws on company closure or dismissal of employees. The failure to give notice is not an unlawful act because the law does not define such failure as unlawful. Such failure to give notice is a violation of procedural due process but does not amount to an unlawful or criminal act. Such procedural defect is called illegal dismissal because it fails to comply with mandatory procedural requirements, but it is not illegal in the sense that it constitutes an unlawful or criminal act.

For a wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act.

An example of a patently unlawful act is violation of Article 287 of the Labor Code, which states that "[V]iolation of this provision is hereby declared unlawful and subject to the penal provisions provided under Article 288 of this Code." Likewise, Article 288 of the Labor Code on Penal Provisions and Liabilities, provides that "any violation of the provision of this Code declared unlawful or penal in nature shall be punished with a fine of not less than One Thousand Pesos (P1,000.00) nor more than Ten Thousand Pesos (P10,000.00), or imprisonment of not less than three months nor more than three years, or both such fine and imprisonment at the discretion of the court."

In this case, Article 28328 of the Labor Code, requiring a one-month prior notice to employees and the Department of Labor and Employment before any permanent closure of a company, does not state that non-compliance with the notice is an unlawful act punishable under the


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Code. There is no provision in any other Article of the Labor Code declaring failure to give such notice an unlawful act and providing for its penalty.

Complainants did not allege or prove, and Arbiter Ortiguerra did not make any finding, that Carag approved or assented to any patently unlawful act to which the law attaches a penalty for its commission. On this score alone, Carag cannot be held personally liable for the separation pay of complainants.

This leaves us with Arbiter Ortiguerra's assertion that "when the company had already ceased operations and there is no way by which a judgment in favor of employees could be satisfied, corporate officers can be held jointly and severally liable with the company." This assertion echoes the complainants' claim that Carag is personally liable for MAC's debts to complainants "on the basis of Article 212(e) of the Labor Code, as amended," which says:

'Employer' includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer. (Emphasis supplied)

Indeed, complainants seek to hold Carag personally liable for the debts of MAC based solely on Article 212(e) of the Labor Code. This is the specific legal ground cited by complainants, and used by Arbiter Ortiguerra, in holding Carag personally liable for the debts of MAC.

We have already ruled in McLeod v. NLRC29 and Spouses Santos v. NLRC30 that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. The governing law on personal liability of directors for debts of the corporation is still Section 31 of the Corporation Code. Thus, we explained in McLeod:

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are 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) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action. http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

x x x

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/


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2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - which the Court of Appeals cited, does not apply to this case. We quote pertinent portions of the ruling, thus:

(a) Article 265 of the Labor Code, in part, expressly provides:

"Any worker whose employment has been terminated as a consequence of an unlawful lockout shall be entitled to reinstatement with full backwages."

Article 273 of the Code provides that:

"Any person violating any of the provisions of Article 265 of this Code shall be punished by a fine of not exceeding five hundred pesos and/or imprisonment for not less than one (1) day nor more than six (6) months."

(b) How can the foregoing provisions be implemented when the employer is a corporation? The answer is found in Article 212 (c) of the Labor Code which provides:

"(c) 'Employer' includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer."

The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of (the) employer" RANSOM. The corporation, only in the technical sense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-payment of back wages. That is the policy of the law.

x x x x

(c) If the policy of the law were otherwise, the corporation employer can have devious ways for evading payment of back wages. In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial Relations was promulgated against RANSOM. http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - (Emphasis supplied)

Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case. In Santos v. NLRC,


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http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - the Court held, thus:

It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable for nonpayment of backwages for "(i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of backwages." In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court considered the President of the corporation as such officer. The case was cited in Chua vs. NLRC in holding personally liable the vice-president of the company, being the highest and most ranking official of the corporation next to the President who was dismissed for the latter's claim for unpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction personal liability on the part of the company officer. In A.C. Ransom, the corporate entity was a family corporation and execution against it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The doctrine of "piercing the veil of corporate fiction" was thus clearly appropriate. Chua likewise involved another family corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers by the other.

The basic rule is still that which can be deduced from the Court's pronouncement in Sunio vs. National Labor Relations Commission, thus:

We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director's Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (½) interest of said corporation, and his alleged arbitrary dismissal of private respondents.


It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all


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of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents' back salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. Neither Article 212[e] nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable for the debts of the corporation. As this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation:http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

We concur with the CA that these two respondents are not liable. Section 31 of the Corporation Code (Batas Pambansa Blg. 68) provides:

"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith ... shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation, its stockholders or other persons.31 (Boldfacing in the original; boldfacing with underscoring supplied)

Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of Appeals to hold Carag personally liable for the separation pay owed by MAC to complainants based alone on Article 212(e) of the Labor Code. Article 212(e) does not state that corporate officers are personally liable for the unpaid salaries or separation pay of employees of the corporation. The liability of corporate officers for corporate debts remains governed by Section 31 of the Corporation Code.

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 29 February 2000 and the Resolution dated 27 March 2001 of the Court of Appeals in CA-G.R. SP Nos. 54404-06 insofar as petitioner Antonio Carag is concerned.