[No. 11897. September 24, 1918.]

J. F. RAMIREZ, plaintiff and appellee, vs. THE ORIENTALIST Co., and RAMON J. FERNANDEZ, defendants and appellants.

1. 1. PLEADING; DUE EXECUTION OF CONTRACT; AUTHORITY OF OFFICER TO BIND CORPORATION.Where the name of a corporation is signed to the document which is the basis of an action, the failure of the defendant corporation to put in issue, by denial under oath the due execution of the instrument, as required in section 103 of the Code of Civil Procedure, operates as an admission of the authority of the officer to execute the contract, since the authority of the officer to bind the company is essential to the due execution of its contract.

1. 2. ID.; CORPORATIONS; WANT OF AUTHORITY IN AGENT AS SPECIAL DEFENSE.Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the part of the person who assumed to act for it, such defense should be specially pleaded.

1. 3. ID.; AMENDMENTS.While immaterial variances between allegations in the pleadings and the proof adduced at the hearing may be disregarded, it is, nevertheless, still true that relief can be granted only upon matter which is put in issue by the pleadings; and if the proof varies materially from the allegations, the pleadings may, upon the application of the party interested, be amended in order to bring them into conformity with the facts proved.

1. 4. ID.; ID.; SPECIAL DEFENSE.The rule above stated applies equally to a special defense stated in the answer as to the plaintiff's cause of action.

1. 5. CORPORATIONS; CONTRACTS; POWER OF BOARD; RATIFICATION.The power to make corporate contracts resides primarily in the company's board of directors; but the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in this case is held to have occurred when the board, with knowledge that the contract had been made, adopted a resolution recognizing the existence of the contract and directing that steps be taken to enable the corporation to utilize its benefits.

1. 6. ID.; ID.; ACTION OF STOCKHOLDERS.Where a corporate contract has been effected with the approval of the board of directors, a resolution adopted at a

meeting of stockholders refusing to recognize the contract or repudiating it is without effect.

1. 7. CONTRACTS; SURETY; PAROL EVIDENCE TO SHOW CHARACTER IN WHIGH PARTY IS BOUND.The written contract which was the subject of this action contained the corporate name signed at the lower right-hand corner of the contract, in the manner usual with a party signing in the character of principal obligor. The name of another individual was signed somewhat below and to the left of the corporate signature, after the customary manner of those who sign in a subsidiary capacity; but no words were written to indicate clearly whether this individual signed as a principal obligor or as surety. Held: That parol evidence that the intention was that he should be bound as surety and not jointly with the other party.

APPEAL from a judgment of the Court of First Instance of Manila. Harvey, J.

The facts are stated in the opinion of the court.

Jose Moreno Lacalle for appellant Fernandez.

Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."

No appearance for appellee.

STREET, J.:

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit, was engaged in the "business of maintaining and conducting a theater in the city of Manila for the exhibition of cinematographic films. Under the articles of incorporation the company is authorized to manufacture, buy, or otherwise obtain all accessories necessary for conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in the business of marketing films for a manufacturer or manufacturers, there engaged in the production or distribution of cinematographic material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez.

In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films" and the "Milano Films;" and negotiations

were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff, for the purpose of placing the exclusive agency of these films- in the hands of the Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its .treasurer, was chiefly active in this matter, being moved by the suggestions and representations of Vicente Ocampo, manager of the Oriental Theater, to the effect that the securing of the exclusive agency of said films was necessary to the success of the corporation,

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his f ather, placed in the hands of Ramon J. Femandez an offer, dated July 4, 1913, stating in detail the terms upon which the plaintiff would undertake to supply from Paris the aforesaid films. This offer was declared to be good until the end of July; and as only about two days of this period remained, it appeared important for the Orientalist Company to act upon the matter speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the members of the company's board of directors except one, and with the approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A few days later, on August 5, he addressed another letter couched in the same terms, likewise accepting the offer of the exclusive agency for the Milano.films,

The memorandum offer contained a statement of the price at which the films would be sold, the quantity which the representative of each was required to take, and information concerning the manner and intervals of time for the respective shipments. The expenses of packing, transportation and other incidentals were to be at the cost of the purchaser. There was added a clause in which J. F. Ramirez described his function in such transactions as that of a commission agent and stated that he would see to the prompt shipment of the films, would pay the manufacturer, and take care that the films were insuredhis commission for such services being fixed at 5 per cent.

What we consider to be the most material portion of the two letters of acceptance written by R. J. Fernandez to Jose Rarnirez is in the following terms:

"We willingly accepted the offer under the terms communicated by your father in his letter dated at Paris on July 4th of the present year."

These communications were signed in the following form, in which it will be noted the separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company as signed by R. J. Fernandez, in the capacity of treasurer:

"THE ORIENTALIST COMPANY, "By R. J. FERNANDEZ, Treasurer.

"R. J. FERNANDEZ."

Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his offer had been accepted by the Orientalist Company and instruct him to make a contract with the film companies, according to the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter suggestion apparently was that the contract for the films would have to be made directly between the film-producing companies and the Orientalist Company; and it seemed convenient, in order to save time, that the Orientalist Company should clothe J. F. Ramirez with full authority as its attorney-in-fact. This idea was never given effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he indicated in the offer of July 4 that he would do, with the result that the only contracting parties in this case are J. F. Ramirez, of the one part, and the Orientalist Company, with Ramon J. Fernandez, of the other.

ln due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being attached to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these obligations and the first few drafts were dealt with in the following manner: The drafts, upon presentment through the bank, were accepted in the name of the Orientalist Company by its president B. Hernandez, and were taken up by the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films which had been procured by the payment of said drafts were treated by him as his own property; and they in fact never came into the actual possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was made between him and the theater's manager.

During the period, between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several remittances of films from Paris, and it is these shipments which have given occasion for the present action. All of the drafts accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all were accepted in the name of the Orientalist Company by its president, B. Hernandez, except the last, which was accepted. by B. Hernandez individually. None of the drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was finally necessary for the plaintiff himself to take them up as dishonored by nonpayment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon J. Fernandez. As the films which accompanied the dishonored drafts were liable to deteriorate, the court, upon application of the plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver who took charge of the films and sold them. The amount realized from this sale was applied to the satisfaction of the plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial judgment was given for the balance due to the plaintiff, namely, P6,018.93, with interest from May 19r 1914, the date of the institution of the action. In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was declared to be liable subsidiarily, as guarantor. From this judgment both of the parties defendant appealed.

In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover from somebody the amount awarded by the lower court; but each of the defendants insists the other is liable for the whole. It results that the r&al contention upon this appeal is between the two defendants.

It is stated in the brief of the appellant Ramon J. Fernandez, and the statement is not challenged by the Orientalist Company, that the judgment has already been executed as against the company and that the full amount has been made, so that if this Court should find that the Orientalist Company is exclusively and primarily liable for the entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable as principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in order to adjust the rights of the defendants in accordance with such finding.

It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied into the complaint as the foundation of the action. The action is not based upon the dishonored drafts which were accepted by B. Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last draft, which was accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done for the purpose of proving the amount of damages which the plaintiff was entitled to Eecover.

In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and, secondly, the question of the liability of Ramon J. Fernandez, based upon his personal signature to the same documents.

As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as already stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the documents are set out in the complaint. It was therefore incumbent upon the corporation, if it desired to question the authority of Fernandez to bind it, to deny the due execution of said contracts under oath, as prescribed in section 103 of the Code of Civil Procedure. Said section, in the part pertinent to the situation now under consideration, reads as follows:

"When an action is brought upon a written instrument and the complaint contains or has annexed a copy of such instrument, the genuinenesi3 and due execution of the instrument shall be deemed admitted, unless specifically denied under oath in the answer."

No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted without objection from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts f rom the minutes of the proceedings of the company's board of directors and also of extracts from the minutes of the proceedings of the company's stockholders, showing that the making of this contract had been under consideration in both bodies and that the authority to make the same had been withheld by the stockholders. It theref ore becomes necessary f or us to consider whether the admission resulting from the failure of the defendant company to deny the execution of the contracts under oath is binding upon it for all purposes of this lawsuit, or whether such failure should be considered a mere irregularity of procedure which was waived when the evidence referred to was admitted without objection from the plaintiff. The proper solution of this problem makes it necessary to consider carefully the principle underlying the provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should have been interposed, supposing that the company desired to contest this point, is not open to question. ln the case of Merchant vs. International Banking' Corporation (6 Phil. Rep., 314), it appeared that one Brown had signed the name of the defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown had no authority to bind the bank by such contract. It was held that, by failing to deny the contract under oath, the bank had admitted the genuineness and due execution thereof, and that this admission extended not only to the authenticity of the signature of Brown but also to his authority. Said Justice Willard: "The failure of the defendant to deny the genuineness and due execution of this guaranty under oath was an admission, not only of the signature of Brown, but also of his authority to make the contract in behalf of the defendant and, of the power of the defendant to enter into such a contract."

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by reference to the following, among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a corporation upon an appeal bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit was filed by the corporation questioning its signature or the authority of the agent to bind the company. It was held that the plaintiff did not have to prove the due execution of the bond and that the corporation was to be taken as admitting the authority of the agent to make the signature. Among other things the court said: "But it is said that the authority of Barrett to execute the bond is distinguishable from the signing and, although the signature must be denied under oath, the authority of the agent need not be. Upon this we observe that the statute manifestly refers to the legal effect of the signature, rather than the manual act of signing. If the name of the obligor, in a bond, is subscribed by one in his presence, and by his direction, the effect is the same as if his name should be signed with his own hand, and under such circumstances we do not doubt that the obligor must deny his signature under oath, in order to put the obligee to proof of the fact. Quit facit per aliam facit per se, and when the name is signed by one thereunto authorized, it is as much the signature of the principal as if written with his own hand. Therefore, if the principal would deny the authority of the agent, as the validity of the signature is thereby directly attacked, the denial must be under oath."

In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have been given by one A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this case should have been verified.

If the person who signed this note for the company, and upon which they are sued, was not authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to overcome the plea."

It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some form or other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws of California, though it appears to have been taken immediately from the statutes of that State. (Secs. 447 448, California Code of Civil Procedure.)

There is really a broader question here involved than that which relates merely to the formality of verifying the answer with an affidavit. This question arises from the circumstance that the answer of the corporation does not in any way challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set

forth, as a special defense, any such lack of authority in him. Upon well established principles of pleading lack of authority in an officer of a corporation to bind it by a contract executed by him in its name is a defense which should be specially pleadedand this quite apart from the requirement, contained in section 103, that the answer setting up such defense should be verified. by oath. But it should not here escape observation that section 103 also requiresin conf ormity with the general principle above statedthat the denial contemplated in that section shall be specific. An attack on the instrument in general terms is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)

In the first edition of a well-known treatise on the law of corporations we find the following proposition:

"If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set up the defense that the contract was executed by one not authorized as its agent, it must plead non est factum." (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)

Again, says the same author:

"A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce which the suit is brought, unless it pleads that defense. This principle applies equally where the defendant intends to challenge the power of its officer or agent to execute in its behalf the contract upon which the action is brought and where it intends to defend on the ground of a total want of power in the corporation to make such a contract." (Opus citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

"Though the power of the officers of a business corporation to issue negotiable paper in its name is not presumed, such corporation can not avail itself of a want of power in its officers to bind it unless the defense was made on such ground."

The rule has been applied where the question was whether a corporate officer, having admitted power to make a contract, had in the particular instance exceeded that authority, (Merrill vs. Consumers' Coal Co., 114 N. Y., 216); and it has been held that where the answer in a suit against a corporation on its note relies simply on the want of power of the corporation to issue notes, the defendant can not afterwards object that the plaintiff has not shown that the officers executing the note were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the 'corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given. an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved.

We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and due execution of the contracts sued upon, have the effect of eliminating the question of his authority from the case, considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission made in a pleading can not be controverted by the party making such admission; and all proof submitted by him contrary thereto or inconsistent therewith should simply be ignored by the court, whether objection is interposed by the opposite party or not. We can see no reason why a constructive admission, created by the express -words of the statute, should be considered to have less effect than any other admission.

The parties to an action are required to submit their respective contentions to the court in their complaint and answer. These documents supply the materials which the court must use in order to discover the points of contention between the parties; and where the statute says that the due execution of a document which supplies the foundation of an action is to be taken as admitted unless denied under oath, the failure of the defendant to make such denial must be taken to operate as a conclusive admission, so long as the pleadings remain in that form.

It is true that it is declared in section 109 of the Code of Civil Profcedure that immaterial variances between the allegations of a pleading and the proof shall be distregarded and the facts shall be found according to the evidence. The same section, however, recognizes the necessity for an amendment of the pleadings, in all cases where the variance is substantial, to bring them into conformity with the facts proved. That section has, in our opinion, by no means abrogated the general and fundamental principle that relief can only be granted upon matters which are put in issue by the pleadings. A judgment must be in conformity with the case made in the pleadings and established by the proof, and relief can not be granted that is substantially inconsistent with either. A party can no more succeed upon a case proved but not alleged than upon a case alleged but not proved. This rule, of course, operates with like effect upon both parties, and applies equally to the defendant's special defense as to the plaintiff's cause of action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the answer of the defendant to be amended; and if we believed that the interests of justice so required, we would either exercise that authority or remand the cause for a new trial in the court below. As will appear further on in this opinion, however, we think that the interests of justice will best be promoted by deciding the case, without more ado, upon the issues presented in the record as it now stands.

That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in which the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence tending to destroy its effect is introduced without objection, the circumstance that it was not denied under oath is immaterial. In the earlier of these cases, Crowley vs. Railroad. Co. (60 Cal., 628), an action was brought against a railroad company to recover damages for the death of the plaintiff's minor son, alleged to have been killed by the negligence of the defendant. The defendant company pleaded by way of defense a release purporting to be signed by the plaintiff, and in its answer inserted a copy of the release. The execution of the release was not denied under oath; but at the trial evidence was submitted on behalf of the plaintiff tending to show that at the time he signed the release, he was incompetent by reason of drunkenness to bind himself thereby. It was held that inasmuch as this evidence had been submitted by the plaintiff without objection, it was proper for the court to consider it. We do not question the propriety of that decision, especially as the issue had been passed upon by a jury; but we believe that the decision would have been more soundly planted if it had been said that the incapacity of the plaintiff, due to his drunken condition, was a matter which did not involve either the genuineness or due execution of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be proved under the general issue and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar explanation can, we think, be given of the case of Clark vs. Child (66 Cal.,

87), in which the rule declared in the earlier case was followed. With respect to both decisions we merely observe that upon the point of procedure which they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.

We shall now consider the liability of the defendant company on the merits just as if that liability had been properly put in issue by a specific answer under oath denying the authority of Fernandez to bind it. Upon this question it must at the outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to bind the company by signing its name to the letters in question. It is declared in section 28 of the Corporation Law that corporate powers shall be exercised, and all corporate business conducted. by the board of directors; and this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the board of directors, It is true that it is also declared in the same by-laws that the president shall have the power, and it shall be his duty, to sign contracts; but this has reference rather to the formality of reducing to proper form the contracts which are authorized by the board and is not intended to confer an independent power to make contracts binding on the corporation.

The fact that the power to make corporate contracts is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the board, can create liability, like an individual, by other means than by a formal expression of its will. In this connection the case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. It there appeared that the secretary of the defendant corporation had signed an obligation on its behalf binding it as guarantor of the perf ormance of an important contract upon which the name of another corporation appeared as principal. The defendant company set up by way of defense that its secretary had no authority to bind it by such an engagement. The court found that the guaranty was given with the knowledge and consent of the president and directors, and that this consent was given with as much observance of formality as was customary in the transaction of the business of the company. It was held that, so far as the authority of the secretary was concerned, the contract was binding. In discussing this point, the court quoted with approval the f ollowing language from one of its prior decisions:

"The authority of the subordinate agent, of a corporation often depends upon the course of dealings which the company or its directors have sanctioned. It may be established sometimes without reference to official record of the proceedings of the board, by proof of the usage which the company had permitted to grow up in the business, and of the acquiescenee of the board charged with the duty of supervising and controlling the company's business."

It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the offer of the Bclair films was dispatched, the board of directors of the Orientalist Company convened in special session in the office of Ramon J. Fernandez at the request of the latter. There were present the four members, including the president, who had already signified their consent to the making of the contracts. At this meeting, as appears from the minutes, Fernandez informed the board of the offer which had been received from the plaintiff with reference to the importation of films. The minutes add that the terms of this offer' were approved; but at the suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter, and definitive action was postponed.

The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed those present of the offer in question and of the terms upon which the films could be procured. He estimated that he company would have to make an outlay of about P5,500 per month, if the offer f or the two films should be accepted by it.

The following extracts from the minutes of this meeting are here pertinent:

"Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose of avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer together with the responsibilities attached thereto, made to the corporation by the film manufacturers of Eclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of films was then expected to arrive.

"At the same time he informed the said stockholders that he had already made arrangements with respect to renting said films after they have been once exhibited in the Cine Oriental, and that the corporation could, very well meet the expenditure involved and net a certain profit, but that, if we could enter into a contract with about nine cinematographs, big gains would be obtained through such a step."

The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable to make the necessary outlay, was foreseen; and in such contingency, the stockholders were informed, that the four gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in importing the films, said payment to be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the purpose, and also because there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and Milano films should be accepted, if the corporation could obtain the money with which to meet the expenditure involved, and to this end appointed a committee to apply to the bank for a credit. The evidence shows that an attempt was made, on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine Islands for the purpose indicated, but that the bank declined to grant this credit. Thereafter another special meeting of the shareholders of the defendant corporation was called at which the failure of their committee to obtain a credit from the bank was made known. A resolution was thereupon passed to the effect that the company should pay to Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing the films, said payment to be made in shares of the company in accordance with the suggestion made at the previous meeting. At the time this meeting was held three shipment of the films had already been received in Manila.

We believe it is a fair inference from the recitals of the minutes of the stockholder's meeting of September 18, and especially from the first paragraph above quoted, that this body was then cognizant that the offer had already been accepted in the name of the Orientalist Company and that the films which were then expected to arrive were being imported by virtue of such acceptance. Certainly four members of the board of directors there present were aware of this fact, as the letters accepting the offer had been sent with their knowledge and consent. In view of this circumstance, a certain doubt arises whether the stockholders meant by their final resolution really to repudiate the contracts which had been made in the name of the company or whether they meant to utilize the financial assistance of the four so-called importers in order that the corporation might get the benefit of the contracts for the films, just as it would have utilized the credit of the bank if such credit had been extended. If such was the intention of the stockholders their action amounted to a virtual, though indirect, approval of the contracts. It is not, however, necessary to found the judgment on this interpretation of the stockholder's proceedings, inasmuch as we think, for reasons presently to be stated, that the corporation is bound, and we will here assume that in the end the contracts were not approved by the stockholders.

It will be observed that Ramon J. Fernandez Was the particular officer and member of the board of directors who was most active in the effort to secure the films for the corporation. The negotiations were conducted by him with the knowledge and consent of other members of the board; and the contract was made with their prior approval. As appears from the papers in this record, Fernandez was the person to whose keeping was confided the printed stationery bearing the official style of the corporation, as well as a rubber stencil with which the name of the corporation could be signed to documents bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of directors of the Orientalist Company; we find that upon October 27, 1913, after Fernandez had departed from the Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among other powers on Vicente Ocampo, the manager of the Oriental theater, namely:

1. "(1) To rent a box for the films in the 'Kneedler Building.' 2. " (4) T'o be in charge of the films and of the renting of the same. 3. " (5) To advertise in the different newspapers that we are importing films to be

exhibited in the Cine Oriental. 4. " (6) Not to deliver any film for rent without first receiving the rental therefor or the

guaranty for the payment thereof. 5. "(7) To buy a book and cards for indexing the names of the films. 6. " (10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the

Hon. R. Acufia to enter into agreements with cinematograph proprietors in the provinces for the purpose of renting films from us."

It thus appears that the board of directors, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contracts as being in existence and had proceeded to take the steps necessary to utilize the films. Particularly suggestive is the direction given at this meeting for the publication of announcements in the newspapers to the effect that the company was engaged in importing films. ln the light of all the circumstances of the case, we are of the opinion that the contracts in question were thus inferentially approved by the company's board of directors and that the company is bound unless the subsequent failure of the stockholders to approve said contracts had the effect of abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be ignored. The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The_ theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors. Accordingly there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea it is settled that contracts between a corporation and third persons must be made by the directors and not by the stockholders. The corporation, in such matters, is represented by the former and not by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the provisions of section 28 of our Corporation Law already referred to. It results that where a meeting of the stockholders is called f or the purpose of passing on the propriety of

making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law; and we would be sorry to announce a doctrine which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporation whose name and authority had been used in the manner disclosed in this case. As already observed, it.is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing power to do those acts, the corporation will, as against any one who has in good f aith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by the directing power "of the corporation."

It being determined that the corporation is bound by the contracts in question, it remains to consider the character of the liability assumed by Ramon J. Fernandez, in affixing his personal signature to said contracts. The question here is whether Fernandez is liable jointly with the Orientalist Company as a principal obligor, or whether his liability is that of a guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with the signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat below. Observation teaches that it is customary for persons who sign contracts in some capacity other than that of principal obligor to place their signatures to one side; but we hardly think that this circumstance alone would justify a court in holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor. We do, however, think that the form in which the contract is signed raises a doubt as to what the real intention was; and we feel justified, in looking to the evidence to discover that intention. ln -this connection it is entirely clear, from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be that of a guarantor. There is, to be sure, a certain difference between these witnesses as to the nature of this guaranty, inasmuch as Fernandez would have us believe that his name was signed as a guaranty that the contract would be approved by the corporation, while Ramirez says that the name was put on the contract for the

purpose of guaranteeing, not the approval of the contract, but its performance. We are convinced that the latter was the real intention of the contracting parties.

We are not unmindful of the force of that rule of law which declares that oral evidence is inadmissible to vary the effect of a written contract. But it must be remembered that ambiguities with respect to the meaning of the language used by the parties may be explained by parol evidence and we see no reason why an ambiguity arising, as in this case, from the form in which the contract was signed may not be explained in the same way. It is certainly the duty of a court to seek the means, of giving effect to the intention of the contracting parties rather than to seek pretexts for defeating it.

If the name of a person not interested in the performance of these contracts had appeared written in the place where the name of Ramon J. Fernandez is signed, and the evidence had shown that such name was there written merely to attest the signature of the corporation, or of Ramon J. Fernandez.as treasurer, no court would have had any hesitation in holding that no liability had been incurred though words were wanting to show how the name was signed.

We are of the opinion that where a name is signed ambiguously, parol evidence is admissible to show the character in which the signature was affixed. This conclusion is perhaps supported by the language of the second paragraph of article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to the evident intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible from the general principle that in case of ambiguity parol evidence is admissible to show the intention of the contracting parties.

It should be stated in conclusion that as the issues in this case have been framed, the only question presented to this court is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez ? No contentious issue is raised directly between the def endants, the Orientalist Company and Ramon J. Fernandez; nor does the present action involve any question as to the undertaking of Fernandez and his three associates to effect the importation of the films upon their own account and risk. Whether they may be bound to hold the company harmless is a matter upon which we express no opinion.

The judgment appealed from is affirmed, with costs equally against the two appellants. So ordered.

Torres, Johnson, Malcolm, Avancena, and Fisher, JJ., concur.Judgment affirmed.

No. L-23428. November 29, 1968.

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

Special civil action; Preliminary injunction; Dissolution;

When verification of motion for dissolution of writ of preliminary injunction is required.From the rulings in Sy Yam Bio, et al. v. Barrios, et al., 63 Phil. 203; Caluya, et al. v. Ramos, et al., 79 Phil. 640, and Canlas, et al. v. Aquino, et al., L-16815, July 24, 1961, as well as from the terminology of Section 6 of Rule 58 of the new Rules of Court, it is evident that whether the application for dissolution of a writ of preliminary injunction must be verified or not depends upon the ground upon which such application is based. If the application or motion for dissolution is based on the insufficiency of the complaint, the motion need not be verified. If the motion is based on the ground that the injunction would cause great damage to defendant while the plaintiff can be fully compensated for such damages as he may suffer, the motion should be verified.

Same; A preliminary injunction issued after hearing and in accordance with Rule 58 may still be set aside; Reason: A writ of preliminary injunction is an interlocutory order; Sec. 6 of Rule 58 construed; Writ may be dissolved without giving the other party an opportunity to be heard.The provision of Section 6 of Rule 58 that "the injunction may be refused, or, if granted ex parte, may be dissolved" cannot be construed as putting beyond the reach of the court the dissolution of an injunction which was granted after hearing. The reason is because a writ of preliminary injunction is an interlocutory order, and as such it is always under the control of the court before final judgment (Manila Electric Co. v. Artiaga, et al., 50 Phil. 144; Caluya, et al. v. Ramos, et al., 79 Phil 640; Clarke v. Philippine Ready Mix Concrete Co., Inc., 88 Phil. 460).

Corporation law; Director; Stock; To qualify as a director of a corporation, one must own at least one share of stock therein.Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation (Sec. 30, Corporation Law). So that, if the By-Laws of the Corporation provides that "The manager shall be elected by the Board of Directors from among its members," one could not be a managing director of said corporation unless he owns at least one share of stock thereof.

Same; Dispute as to who owns the controlling interest in the corporation; Party in control or in possession of the controlling interest is presumed to have the better right to the position of managing corporate director.Where ownership of the controlling interest in the corporation is in dispute, the party in control or in possession of the disputed interest is presumed to have the better right (to the position of managing' corporate director) until the contrary is adjudged, and hence, that party should not be deprived of the control or possession until the court is prepared to adjudicate the controverted right in favor of the other party (Gordillo, et al. v. Del Rosario, et al., 39 Phil. 829). Relevant here is: "The rule that a court should not, by means of a preliminary injunction, transfer property in litigation from the possession of one party to another is more particularly applicable where the legal title is in dispute and the party having possession asserts ownership in himself" (Gordillo, et al. v. Del Rosario, supra; Rodulfa v. Alfonso, et al., 79 Phil. 225).

Special civil action; Writ of preliminary injunction; Issuance discretionary upon trial court; Limitation of court's discretion; Wide latitude of trial court's discretion in the modifica-tion or dissolution of the writ.It is a settled rule that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is 'entirely within the discretion of the court taking cognizance of the casethe only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law (Agno River Gold Dredging Co., Inc. v. De Leon, et al., 61 Phil. 190), and it is equally well-settled that a wide latitude is given under Section 7 of Rule 58 of the Rules of Court to the trial court to modify or dissolve the injunction as justice' may require. The court which is to exercise that discretion is the trial court, not the appellate court (North Negros Co., Inc. v. Hidalgo, 63 Phil. 664). The exercise of sound judicial discretion by the lower court in injunctive matters should not be interfered with except in cases of manifest abuse (Rodulfa v. Alfonso, supra; North Negros Sugar Co. v. Hidalgo, supra).

Same; Petition for certiorari against a trial court's order dissolving writ of preliminary injunction; Prior motion for reconsideration filed with trial court required; Exception.Before a petition for certiorari should be filed with the Supreme Court, against an order dissolving the writ of preliminary injunction the petitioner -should first give the respondent Judge (or trial court) a chance or opportunity to correct his error, if any, in an appropriate motion for reconsideration. An omission to comply with this procedural requirement justifies a denial of the writ of certiorari applied for (Herrera v. Barreto, et al., 25 Phil. 245; Uy Chu v. Imperial, et al, 44 Phil. 27; Alvarez, et al. v. Ibaez, et al., 83 Phil. 104; Ricafort v. Duran, 54 O.G. 2539; Cueto v. Ortiz, L-11555, May 31, 1960; Pagkakaisa Samahang Manggagawa ng San Miguel Brewery v. Enriquez, L-12999, July 26, 1960; Maritime Company of the Philippines, et al. v. Paredes, et al., L-24811, March 3, 1967). The exceptions to the application of this procedural rule are: (1) where the question of jurisdiction has been squarely raised, argued before, submitted to, and met and decided by the respondent court;

(2) where the questioned order is a patent nullity; and (3) where there is a deprivation of the petitioner's fundamental right to due process (Moran, Comments on the Rules of Court, 1963 ed., Vol. III, p. 154).

ORIGINAL PETITION in the Supreme Court. Certiorari with preliminary injunction.

The facts are stated in the opinion of the Court.

Crispin D. Baizas & Associates and Jose S. Sarte for petitioner.

Gaudencio T. Bocobo for respondents.

ZALDIVAR, J.:

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

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

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

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

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

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

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

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

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

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

"Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No. 4634 was not verified, is also groundless inasmuch as even an indirect verbal application for the dissolution of an ex parte order of preliminary injunction has been held to be a sufficient compliance with the provisions of section 6 of Rule 60 (Moran, Comments on the Rules of Court, Second Edition, Vol. II, p. 65, citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious reason being that said rule does not prescribe the form by which an application for the dissolution or modification of an order of preliminary injunction should be presented."

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

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

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

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

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

2. The second and third reasons alleged by petitioner in its petition for certiorari assume that a preliminary injunction issued after hearing and in accordance with Rule 58 cannot be set aside. This contention is untenable. The provision of Section 6 of Rule 58 that "the injunction may be refused, or, if granted ex parte, may be dissolved" cannot be construed as

putting beyond the reach of the court the dissolution of an injunction which was granted after hearing. The reason is because a writ of preliminary injunction is an interlocutory order, and as such it is always under the control of the court before final judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4 this Court said:

"The first contention of the petitioners is that, as said injunction was issued after a hearing, the same cannot be dissolved, specially on the strength of an unverified motion for dissolution and in the absence of proper evidence to support it. Reliance is placed on Section 6 of Rule 60 of the Rules of Court which provides that 'the injunction may be reduced, or, if granted ex parte, may be dissolved,' thereby arguing that if an injunction is not issued ex parte the same cannot be dissolved. The contention is clearly erroneous. Although said section prescribes the grounds for objecting to, or for moving the dissolution of, a preliminary injunction prior to its issuance or after its granting ex parte, it does not thereby outlaw a dissolution if the injunction has been issued after a hearing. This is to be so, because a writ of preliminary injunction is an interlocutory order which is always under the control of the court before final judgment. (Manila Electric Company vs. Artiaga and Green, 50 Phil. 144, 147)."

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

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

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

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

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

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

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

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

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

Should it be the truth that respondent Alberto is the controlling stockholder, then the damages said respondent would suffer would be the same, if not more, as the damages that the corporation would suffer if the injunction were maintained. If the bond of P5,000 filed by petitioner for the injunction would be sufficient to answer for the damages that would be

suffered by respondent Alberto by reason of the injunction, there seems to be 110 reason why the same amount would not be suf f icient to answer for the damages that might be suffered by the petitioning corporation by reason of the lifting of the injunction. The following ruling of this Court has a persuasive application in this case:

"The rule that a court should not, by means of a preliminary injunction, transfer property in litigation from the possession 01 one party to another is more particularly applicable where the legal title is in dispute and the party having possession asserts ownership in himself."7

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

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

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

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

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

Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Fernando and Capistrano, JJ., concur.

Petition dismissed.

Gokongwei, Jr. vs. Securities and Exchange Commission

No. L-45911. April 11, 1979.*

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

Supreme Court; Judgments; Securities and Exchange Commission; Corporation Law; Supreme Court always strives to settle a legal controversy in a single proceeding.xxx 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 Distillery, 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.

Corporation Law; While reasonableness of a by-law is a legal question, where reasonableness of a by-law provision is one in which reasonable minds may differ a court will not be justified in subsisting its judgment for those authorized to make the by-laws.The validity or reasonableness of a by-law of a corporation is purely a question of law. 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. 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.

Same; Under the Corporation Law a corporation is authorized to prescribe the qualification of its directors.In this jurisdiction, under Section 21 of the Corporation Law, a corporation may prescribed 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 * * *.

Same; Stockholder has no vested right to be elected as stockholder.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 implied 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. 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 or his fellow incorporators. **** It can not 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, ***.

Same; A director stands in a fiduciary relation to the competition and its stockholders. The disqualification of a competition from being elected to the board of directors is a reasonable exercise of corporate authority. 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 for the collective benefit of the stockholders, they occupy a fiduciary relation, and in these sense the relation is one of trust.

Same; Same.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 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 corporate duties above his personal concerns.

Same; Same.Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may well require that he disclose this information to a competitive rival. 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.

Same; Another reason for upholding a by-law provision that forbids a competitor to be elected as corporate director are the laws prohibiting cartels.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: That State shall regulate or prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.

Same; Same.Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers effectiveness as the final arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices and the highest quality ***. They operate to forestall concentration of economic power. 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.

Same; Election of petitioner as San Miguel Corporation Director may run counter to the prohibition contained in Section 13(5) of Corporation Law on investments in corporations engaged in agriculture.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 such corporations. ***.

Same; The by-law amendment of SMC applies equally to all and does not discriminate against petitioner only.However, the by-law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-laws 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 competitor from election to the Board of Directors of another corporation is valid and reasonable.

Same; Petitioner is not ipso facto disqualified to run on SMC director. He must be given full opportunity by the SEC to show that he is not covered by the disqualification.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. 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 and Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari.

Same; Every stockholder has the right to inspect corporate books and records.The stockholders right of inspection of the corporations 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 quasi-ownership. This right is predicated upon the necessity of selfprotection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to germane to the petitioners interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation.

Same; The right of stockholder to inspect corporate books extends to a wholly-owned subsidiary.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 owned subsidiary which are in respondent corporations possession and control.

Same; Purely ultra vires corporate acts of corporate officers to invest corporate funds in another business or corporation, i.e., acts not contrary to law, morals, public order as public policy, may be ratified by the stockholders holding 2/3 of the voting power.Assuming arguendo that the Board of Directors of San Miguel Corporation 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. 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 purported 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 twothirds 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, 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.

Corporation Law; Judgment; The doctrine of the law of the case.We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has no applicability for the following reasons: a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a final and conclusive determination of an issue in the first case later invoked as the law of the case.

Same; Same; When doctrine of the law of the case not applicable.The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as the question of the validity or invalidity of the amended by-laws is concerned. The Courts judgment of April 11, 1979 clearly shows that the voting on this question inconclusive with six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect likewise expressly reserved his vote thereon. No final aad conclusive determination could be reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil action originally commenced in this Court, the action was simply dismissed with the result that no law of the case was laid down insofar as the issue of the validity or invalidity of the questioned by-laws is concerned, and the relief sought herein by petitioner that this Court bypass the SEC which has yet to hear and determine the same issue pending before it below and that this Court itself directly resolve the said issue stands denied.

Same; Same; Constitutional Law; Due Process; When procedural due process was not observed.The entire Court, therefore, recognized that petitioner had not been given procedural due process by the SMC board on the matter of his disqualification and that he was entitled to a new and proper hearing. It stands to reason that in such hearing, petitioner could raise not only questions of fact but questions of law, particularly questions of law affecting the investing public and their right to representation on the board as provided by lawnot to mention that as borne out by the fact that no restriction whatsoever appears in the Courts decision, it was never contemplated that petitioner was to be limited questions of fact and could not raise the fundamental question of law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC board. Furthermore, it was expressly provided unanimously in the Courts decision that the SMC

boards decision on the disqualification of petitioner (assuming the board of directors of San Miguel Corporation should, after the proper hearing, disqualify him as qualified in Mr. Justice Barredos own separate opinion, at page 2) shall be appealable to respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court.

Same; Same; Reservation of the vote of the Chief Justice.As expressly stated in the Chief Justices reservation of his vote, the matter of the question of the applicability of the said section 13(5) to petitioner would be heard by this Court at the appropriate time after the proceedings below (and necessarily the question of the validity of the amended by-laws would be taken up anew and the Court would at that time be able to reach a final and conclusive vote).

Same; Same; Validity of the amended by-laws.The six votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, De Castro and this writer in favor of validity of the amended by-laws in question, with only four members of this Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and Justice Fernando reserving their votes thereon and Justice Aquino and Melencio Herrera not voting, thereby resulting in the dismissal of the petition insofar as it assails the validity of the amended by-laws . . . . for lack of necessary votes, has no other legal consequence than that it is the law of the case far as the part