Corpo de Facto

G.R. No. L-21114 November 28, 1967

FEDERICO FERNANDEZ, plaintiff-appellant, vs.P. CUERVA and CO., defendant-appellee.

ZALDIVAR, J.:

This is an appeal from the order of the Court of First Instance of Manila, dated January 29, 1963, in its Civil Case No. 52946, dismissing the complaint upon the ground that the action in the first two causes of action had prescribed and that it had no jurisdiction over the third cause of action.

It appears that plaintiff Federico Fernandez was employed as salesman by defendant P. Cuerva & Co. from March, 1949 to October, 1959. After his separation from the service, plaintiff filed a claim, on July 26, 1960, before Regional Office No. 4 of the Department of Labor,1 docketed as L. S. Case No. 2940, to recover unpaid salaries and commissions, and separation pay.

During the pendency of said case, or on December 17, 1962, plaintiff again instituted a similar complaint against the same defendant with the Court of First Instance of Manila (Civil Case No. 52946) alleging, among others, that he was employed by defendant company as salesman in March, 1949 with a salary of P200.00 per month that beginning June, 1955 until the termination of his services in October, 1959, his salary was increased to, P300.00 monthly and was given, in addition, a commission of 10% on his sales; that the increase of P100.00 a month and the 10% commission were not actually received by him as there was a verbal understanding between him and defendant company that the same would be retained by the latter as bond or deposit for the goods being handled by the former; and that because plaintiff was separated from the service in October, 1959, he sought to recover the sum of P5,300.00 representing the P100.00 monthly

deductions from his salary; P4,770.00 corresponding to his 10% commissions that were withheld, and P1,500.00 as separation pay, or the total sum of P11,570.00. These three items were respectively the subject matter of the first, second and third causes of action of the complaint.

On January 2, 1963, defendant filed a motion to dismiss the complaint upon the grounds that the actions had prescribed and that the court had no jurisdiction over the case. The court below, after allowing the parties to submit their respective memorandum on the questions of prescription and jurisdiction, dismissed the case, in an order issued on January 29, 1963, holding that because the claim of plaintiff in the first two causes of action amounting to P10,070.00 represented the sum total of unauthorized deductions from his salaries and withheld commissions, under Section 10, paragraph (f) of Republic Act No. 602, otherwise known as the Minimum Wage Law, the action to recover the same was already barred under Section 17 of said Act inasmuch as it was not brought within three years from the time the right of action accrued; and that because the remaining claim of plaintiff was limited to his separation pay amounting only to P1,500.00, the action to collect the same was not within the original jurisdiction of the court.

On February 1, 1963, plaintiff moved to reconsider the above-mentioned order, advancing as his main argument the fact that his having filed a similar claim with Regional Office No. 4 of the Department of Labor had suspended the running of the prescriptive period insofar as his claim for refund of unauthorized deductions and withheld commissions was concerned — which were the subject matters of the first and second causes of action that were dismissed by the court. The defendant filed an opposition to the motion for reconsideration. In an order dated February 15, 1963, the court denied plaintiff's motion for reconsideration. Hence this appeal by the plaintiff direct to this Court on purely questions of law.

We are in accord with the court a quo that the law applicable to the case at bar is Republic Act 602 because the bond or deposit sought to be recovered by appellant was actually the sum total of the unauthorized deductions from his salaries and withheld commissions under Section 10 thereof. Under Section 17 of said law, "any action . . . to enforce any cause of action under this Act may be commenced within three years after the cause of action accrued, and every such action shall be forever barred unless commenced within three years after the cause of action accrued." Since a right of action accrues only from the moment the right to commence the action comes into existence, and prescription begins to run from that time,2 the question to be resolved is: When did the right of action of plaintiff accrue?

To answer the foregoing query, it is meet to recall that while the amounts withheld by defendant were actually deductions from plaintiff's salaries and unpaid commissions, they were, however, constituted as a bond or a deposit to answer for any liability that he might incur in connection with the goods handled by him. The bond and/or deposit was thus answerable for merchandise entrusted to plaintiff during the period of his employment with defendant. It was, therefore, not feasible for plaintiff to demand every month or every payday, or during the period of his employment with the company the return or refund of those amounts withheld as contended by defendant, because the undertaking for which the bond or deposit was constituted was still subsisting. And so the right of plaintiff to commence an action for the return or refund of the amounts representing such bond or deposit would accrue only when the same was no longer needed, and the time when it was no longer needed only came in October 1959 when plaintiff was separated from the service. Having ceased to be employed by the defendant, the bond put up by plaintiff thereby became unnecessary or useless.

CORPORATION De FACTO 1

It would seem, however, that even if We count from October, 1959 in computing the prescriptive period, plaintiff's action to recover the amount held by defendant as bond is already barred because more than three years had elapsed by the time plaintiff instituted the present case in the court below on December 17, 1962. The record, however, shows that on July 26, 1960, plaintiff filed a similar claim against the defendant with Regional Office No. 4 of the Department of Labor.

At this juncture, the question posed is: Did the filing by plaintiff of that claim with the regional office of the Department of Labor suspend the running of the period of prescription?

Defendant answers the question in the negative. While defendant does not question the applicability to the case at bar of Article 1155 of the Civil Code, which provides that the "prescription of actions is interrupted when they are filed before the Court," nevertheless, it contends that inasmuch as plaintiff's claim was lodged with the regional office of the Department of Labor, which is not a court, the same could not be considered a judicial demand that would suspend the running of the prescriptive period.

We do not agree with defendant. It is true that the claim filed by plaintiff with the regional office of the Department of Labor is not a judicial demand in the same sense of the term "judicial demand" because the same was not instituted in a court of justice. Judicial notice, however, should be taken that on December 10, 1956, Reorganization Plan No. 20-A was promulgated pursuant to Republic Act 997, and under Section 25 of said reorganization plan each regional office of the Department of Labor was vested with original and exclusive jurisdiction over all cases affecting all money claims arising from violations of labor standards on working conditions such as unpaid wages, underpayment, overtime and separation pay, etc., to the exclusion of courts.3Consequently, when plaintiff wanted to enforce his

claim after his dismissal from the service in October, 1959, he had no choice but to file the same with Regional Office No. 4 of the Department of Labor which was the agency then empowered to take cognizance of the claim. He could not institute the action to recover his claim in the court of justice because of the provisions of Reorganization Plan No. 20-A. At least it may be said that on July 26, 1960, when plaintiff filed his claim with Regional Office. No. 4 of the Department of Labor, he acted in accordance with the procedure that was then prescribed under authority of law. Under the circumstances, We believe that the filing by plaintiff of his claim before the regional office of the Department of Labor had the attributes of a judicial demand. And We say this because under the provisions of Section 25 of Reorganization Plan No. 20-A each regional office of the Department of Labor was invested with jurisdiction, similar to that of a court, to receive, determine, and adjudicate claims arising out of employer-employee relations as specified in said section. We quote Section 25 of Reorganization Plan No. 20-A:

Each Regional Office shall have original and exclusive jurisdiction over all cases affecting all money claims arising from violations of labor standards on working conditions, including but not restrictive to: unpaid wages, underpayment, overtime, separation pay, and maternity leave of employees/laborers and unpaid wages, overtime, separation pay, vacation pay, and payment for medical services of domestic held. (Emphasis supplied)

It can be gathered from a reading of the above-quoted Section 25 of Reorganization Plan No. 20-A that some sort of judicial powers was conferred upon the regional offices of the Department of Labor over money claims mentioned in said section. Certainly, it can be considered that filing a money claim before a regional office of the Department of Labor pursuant to Section 25 of

Reorganization Plan No. 20-A is like filing a complaint in court to enforce said money claim. We believe that the filing of a claim before an administrative agency which is vested with authority to decide said claim would produce the effect of a judicial demand for the purpose of interrupting the running of the period of prescription. The purpose of the law on prescription and the statute of limitations is to protect the person who is diligent and vigilant in asserting his right, and conversely to punish the person who sleeps on his right.4 Indeed, it cannot be said that in the case before Us the plaintiff had slept on his right, because shortly after he was separated from the service by the defendant he filed his claim before the agency of the government that was at the time clothed with exclusive authority to pass upon his claim.

We have taken note of the fact that on June 30, 1961, Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional by this Court in the case of Corominas, et al. v. The Labor Standards Commission, et al., supra. It appears, however, that the plaintiff had filed his claim before Regional Office No. 4 of the Department of Labor on July 26, 1960, or about one year before said Section 25 had been declared unconstitutional. The circumstance that Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional should not be counted against the defendant in the present case. In the case of Manila Motor Co., Inc. v. Flores, 99 Phil., 738, this Court upheld the right of a party under the Moratorium Law which had accrued in his favor before said law was declared unconstitutional by this Court in the case of Rutter v. Esteban, 93 Phil., 68. This Court, in its decision in the Manila Motor case, quoted the following doctrine:

[t]here are several instances wherein courts, out of equity, have relaxed its operation (cf. note in Cooley's Constitutional Limitations 8th ed., p. 383 and Notes 53 A.L.R., 273) or qualified its effects "since the actual


existence of a statute prior to such declaration is an operative fact, and may have consequences which cannot justly be ignored" (Chicot County vs. Baster, 308 U.S., 371) and a realistic approach is eroding the general doctrine (Warring vs. Colpoys 136 Am. Law Rep., 1025, 1030).

We believe that it is only fair and just that the foregoing doctrine should be applied in favor of the plaintiff in the present case.

We have noted in the record that it was precisely because Section 25 of Reorganization Plan No. 20-A was declared unconstitutional by this Court on June 30, 1961 that the plaintiff, without awaiting the action of Regional Office No. 4 of the Department of Labor on the claim that he filed on July 26, 1960, instituted his action in the present case in the court below on December 17, 1962. The move of plaintiff was precisely intended to protect his right of action from the adverse effect of the decision of this Court. The Regional Office No. 4 of the Department of Labor dismissed plaintiff's claim on January 16, 1963 upon the ground that it had no more jurisdiction to pass upon the claim as a result of the ruling of this Court in the Corominas case.

Considering that from October, 1959 when plaintiff was separated from the service up to July 26, 1960 when he filed his claim with Regional Office No. 4 of the Department of Labor only eight months had elapsed, and that since July 26, 1960 until the filing of the complaint in the court below on December 17, 1962 the running of prescriptive period was deemed interrupted, it is clear that plaintiff's action to enforce his claim was not yet barred by the statute of limitations when he filed his complaint in the court below. Plaintiff's action may be considered as brought before the court still within the period of three years from the time his right of action accrued in accordance with the provisions of Section 17 of Republic Act 602 (Minimum Wage Law). Only about nine months

of the three-year period provided in Section 17 of Republic Act 602 may be considered as having lapsed when plaintiff commenced his action in the court below. And considering further that the amount sought to be recovered in the complaint is more than P10,000.00, it follows that the court a quo has the exclusive and original jurisdiction to entertain the action of the plaintiff. The lower court, therefore, erred when it dismissed plaintiff's complaint.

WHEREFORE, the order appealed from is set aside, and this case is remanded to the court below for further proceedings, with costs against the defendant-appellee. It is so ordered.

G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs.EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc.,respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and

managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the receiver, but


the respondent judge refused to accept the offer and to discharge the receiver. Whereupon, the present special civil action was instituted in this court. It is based upon two main propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because it being ade facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation but only a partnership.

Discussion: The second proposition may at once be dismissed. All the parties are informed that the Securities and Exchange Commission has not, so far, issued the corresponding certificate of incorporation. All of them know, or sought to know, that the personality of a corporation begins to exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law). The complaining associates have not represented to the others that they were incorporated any more than the latter had made similar representations to them. And as nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is not an instance requiring the enforcement of contracts with the corporation through the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction to take cognizance of said civil case number 381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation under this Act and its right

to exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may be a party, but such inquiry may be had at the suit of the Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders — may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject to review on appeal. Whkch brings us to one principal reason why this petition may not prosper, namely: the petitioners have

their remedy by appealing the order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be admitted that receivership is proper in proceedings for dissolution of a company or corporation, and it was no error to reject the counter-bond, the court having declared the dissolution. As to the amount of the bond to be demanded of the receiver, much depends upon the discretion of the trial court, which in this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore issued will be dissolved.

[G.R. No. L-7231. March 28, 1956.]

BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO PINEDA, in his capacity as Securities and Exchange Commissioner, Respondent. CONSOLIDATED MINES, INC., Intervenor.

D E C I S I O N

REYES, J. B. L., J.:

Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner, denying the right of a sociedad anonima to extend its corporate existence by amendment of its original articles of association, or alternatively, to reform and continue existing under the Corporation Law (Act 1459) beyond the original period.

The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed “Benguet” for short), was organized on June 24,1903, as a sociedad anonima regulated by Articles 151 et seq., of the Spanish Code of Commerce of 1886, then in force in the Philippines. The articles of association


expressly provided that it was organized for a term of fifty (50) years. In 1906, the governing Philippine Commission enacted Act 1459, commonly known as the Corporation Law, establishing in the islands the American type of juridical entities known as corporation, to take effect on April 1, 1906. Of its enactment, this Court said in its decision in Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and 147:chanroblesvirtuallawlibrary

“When the Philippine Islands passed to the sovereignty of the United States, the attention of the Philippine Commission was early drawn to the fact there is no entity in Spanish law exactly corresponding to the motion of the corporation in English and American law; chan roblesvirtualawlibraryand in the Philippine Bill, approved July 1, 1906, the Congress of the United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in sections 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This provision, in its original form, reads as follows:chanroblesvirtuallawlibrary cralaw it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining.

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in what is

called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American corporate law.”

“As it was the intention of our lawmakers to stimulate the introduction of the American corporation into the Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustment resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law ‘so far as such provisions may be applicable’ and giving to the sociedades anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that were in force prior to the passage of this Act ‘in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.’“

Specifically, the two sections of Act No. 1459 referring to sociedades anonimas then already existing, provide as follows:chanroblesvirtuallawlibrary

“SEC. 75. Any corporation or a sociedad anonima formed, organized, and existing under the laws of the Philippines on the date of the passage of this Act, shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled at its option either to continue business as such corporation or to reform and organize under and by virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the old corporation according to their interests.”

“SEC. 191. The Code of Commerce, in so far as it relates to corporation or sociedades anonimas, and all other Acts or parts of Acts in conflict or inconsistent with this Act, are hereby repealed with the exception of Act Numbered fifty-two, entitled ‘An Act providing for examinations of banking institutions in the Philippines, and for reports by their officers,’ as amended, and Act Numbered Six hundred sixty-seven, entitled ‘An Act prescribing the method of applying to governments of municipalities, except the city of Manila and of provinces for franchises to contract and operate street railway, electric light and power and telephone lines, the conditions upon which the same may be granted, certain powers of the grantee of said franchises, and of grantees of similar franchises under special Act of the Commission, and for other purposes.’ Provided, however, That nothing in this Act contained shall be deemed to repeal the existing law relating to those classes of associations which are termed sociedades colectivas, and sociedades de cuentas en participacion, as to which association the existing law shall be deemed to be still in force; chan roblesvirtualawlibraryAnd provided, further, That existing corporations or sociedades anonimas, lawfully organized as such, which elect to


continue their business as such sociedades anonimas instead of reforming and reorganizing under and by virtue of the provisions of this Act, shall continue to be governed by the laws that were in force prior to the passage of this Act in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”

As the expiration of its original 50 year term of existence approached, the Board of Directors of Benguet adopted in 1946 a resolution to extend its life for another 50 years from July 3, 1946 and submitted it for registration to the Respondent Securities and Exchange Commissioner. Upon advice of the Secretary of Justice (Op. No. 45, Ser. 1917) that such extension was contrary to law, the registration was denied. The matter was dropped, allegedly because the stockholders of Benguet did not approve of the Directors’ action.

Some six years later in 1953, the shareholders of Benguet adopted a resolution empowering the Director to “effectuate the extension of the Company’s business life for not less than 20 and not more than 50 years, and this by either (1) an amendment to the Articles of Association or Charter of this Company or (2) by reforming and reorganizing the Company as a Philippine Corporation, or (3) by both or (4) by any other means.” Accordingly, the Board of Directors on May 27, 1953, adopted a resolution to the following effect —

“Be It

Resolved, that the Company be reformed, reorganized and organized under the provisions of section 75 and other provisions of the Philippine Corporation Law as a Philippine corporation with a corporate life and corporate powers as set forth in the Articles of Incorporation

attached hereto as Schedule ‘I’ and made a part hereof by this reference; chan roblesvirtualawlibraryand

Be It

‘FURTHER RESOLVED, that any five or more of the following shareholders of the Company be and they hereby are authorized as instructed to act for and in behalf of the share holders of the Company and of the Company as Incorporators in the reformation, reorganization and organization of the Company under and in accordance with the provisions aforesaid of said Philippine Corporation Law, and in such capacity, they are hereby authorized and instructed to execute the aforesaid Articles of Incorporation attached to these Minutes as Schedule ‘I’ hereof, with such amendments, deletion and additions thereto as any five or more of those so acting shall deem necessary, proper, advisable or convenient to effect prompt registration of said Articles under Philippine Law; chan roblesvirtualawlibraryand five or more of said Incorporators are hereby further authorized and directed to do all things necessary, proper, advisable or convenient to effect such registration.”

In pursuance of such resolution, Benguet submitted in June, 1953, to the Securities and Exchange Commissioner, for alternative registration, two documents:chanroblesvirtuallawlibrary (1) Certification as to the Modification of (the articles of association of) the Benguet Consolidated Mining Company, extending the term of its existence to another fifty years from June 15, 1953; chan roblesvirtualawlibraryand (2) articles of incorporation, covering its reformation or reorganization as a corporation in accordance with section 75 of the Philippine Corporation Law.

Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No. 180, s. 1953), the Securities and Exchange Commissioner denied the registration and ruled:chanroblesvirtuallawlibrary

(1) That the Benguet, as sociedad anonima, had no right to extend the original term of corporate existence stated in its Articles of Association, by subsequent amendment thereof adopted after enactment of the Corporation Law (Act No. 1459); chan roblesvirtualawlibraryand

(2) That Benguet, by its conduct, had chosen to continue as sociedad anonima, under section 75 of Act No. 1459, and could no longer exercise the option to reform into a corporation, specially since it would indirectly produce the effect of extending its life.

This ruling is the subject of the present appeal.

Petitioner Benguet contends:chanroblesvirtuallawlibrary

(1) That the proviso of section 18 of the Corporation Law to the effect —

“that the life of said corporation shall not be extended by amendment beyond the time fixed in the original articles.”

does not apply to sociedades anonimas already in existence at the passage of the law, likePetitioner herein;

(2) That to apply the said restriction imposed by section 18 of the Corporation Law to sociedades anonimas already functioning when the said law was enacted would be in violation of constitutional inhibitions;

(3) That even assuming that said restriction was applicable to it, Benguet could still exercise the option of reforming and reorganizing under section 75 of the Corporation Law, thereby prolonging its corporate existence, since the law is silent as to the time when such option may be exercised or availed of.

The first issue arises because the Code of Commerce of 1886 under which Benguet was organized, contains no prohibition (to extend the period of corporate existence), equivalent to that set forth in section 18 of the Corporation


Law. Neither does it expressly authorize the extension. But the text of Article 223, reading:chanroblesvirtuallawlibrary

“ART. 223. After the termination of the period for which commercial associations are constituted, it shall not be understood as extended by the implied or presumed will of the members; chan roblesvirtualawlibraryand if the members desire to continue in association, they shall draw up new articles, subject to all the formalities prescribed for their creation as provided in Article 119.” (Code of Commerce.)

would seem to imply that the period of existence of the sociedad anonimas (or of any other commercial association for that matter) may be extended if the partners or members so agree before the expiration of the original period.

While the Code of Commerce, in so far as sociedades anonimas are concerned, was repealed by Act No 1459, Benguet claims that article 223 is still operative in its favor under the last proviso of section 191 of the Corporation law (ante, p. 4 to the effect that existing sociedades anonimas would continue to be governed by the law in force before Act 1459,

“in relation to their organization and method of transacting business and to the rights of members among themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.”

Benguet contends that the period of corporate life relates to its organization and the rights of its members inter se, and not to its relations to the public or public officials.

We find this contention untenable.

The term of existence of association (partnership or sociedad anonima) is coterminous with their possession of an independent legal personality, distinct from that of

their component members. When the period expires, the sociedad anonima loses the power to deal and enter into further legal relations with other persons; chan roblesvirtualawlibraryit is no longer possible for it to acquire new rights or incur new obligations, have only as may be required by the process of liquidating and winding up its affairs. By the same token, its officers and agents can no longer represent it after the expiration of the life term prescribed, save for settling its business. Necessarily, therefore, third persons or strangers have an interest in knowing the duration of the juridical personality of the sociedad anonima, since the latter cannot be dealt with after that period; chan roblesvirtualawlibrarywherefore its prolongation or cessation is a matter directly involving the company’s relations to the public at large.

On the importance of the term of existence set in the articles of association of commercial companies under the Spanish Code of Commerce, D. Lorenzo Benito y Endar, professor of mercantile law in the Universidad Central de Madrid, has this to say:chanroblesvirtuallawlibrary

“La duracion de la Sociedad. — La necesidad de consignar este requisito en el contrato social tiene un valor analogo al que dijimos tenia el mismo al tratar de las compañias colectivas, aun cuando respecto de las anonimas no haya de tenerse en cuenta para nada lo que dijimos entonces acerca de la trascendencia que ello tiene para los socios; chan roblesvirtualawlibraryporque no existiendo en las anonimas la serie de responsibilidades de caracter personal que afectan a los socios colectivos, es claro que la duracion de la sociedad importa conocerla a los socios y los terceros, porque ella marca al limite natural del desenvolvimiento de la empresa constituida y el comienzo de la liquidacion de la sociedad.” (3 Benito, Derecho Mercantil, 292-293.)

“Interesa, pues, la fijacion de la vida de la compañia, desenvolviendose con normalidad y regularidad, tanto a los asociados como a los terceros. A aquellos, porque su

libertad economica, en cierto modo limitada por la existencia del contrato de compañia, se recobra despues de realizada, mas o menos cumplidamente, la finalidad comun perseguida; chan roblesvirtualawlibraryy a los terceros, porque les advierte el momento en que, extinguida la compañia, no cabe y a la creacion con ella de nuevas relaciones juridicas, de que nazcan reciprocamente derechos y obligaciones, sino solo la liquidacion de los negocios hasta entonces convenidos, sin otra excepcion que la que luego mas adelante habremos de señalar”. (3 Benito, Derecho Mercantil, p. 245.)

The State and its officers also have an obvious interest in the term of life of associations, since the conferment of juridical capacity upon them during such period is a privilege that is derived from statute. It is obvious that no agreement between associates can result in giving rise to a new and distinct personality, possessing independent rights and obligations, unless the law itself shall decree such result. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period that it sees fit to grant; chan roblesvirtualawlibraryand, particularly, that it be not abused in fraud and to the detriment of other parties; chan roblesvirtualawlibraryand for this reason it has been ruled that “the limitation (of corporate existence) to a definite period is an exercise of control in the interest of the public” (Smith vs. Eastwood Wire Manufacturing Co., 43 Atl. 568).

We cannot assent to the thesis of Benguet that its period of corporate existence has relation to its “organization”. The latter term is defined in Webster’s International Dictionary as:chanroblesvirtuallawlibrary

“The executive structure of a business; chan roblesvirtualawlibrarythe personnel of management, with its several duties and places in administration; chan roblesvirtualawlibrarythe various persons who conduct a business, considered as a unit.”


The legal definitions of the term “organization” are concordant with that given above:chanroblesvirtuallawlibrary

“Organize or ‘organization,’ as used in reference to corporations, has a well-understood meaning, which is the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan. 107, 33 Am. St. Rep. 355; chan roblesvirtualawlibraryTopeka Bridge Co. vs. Cummings, 3 Kan. 55, 77; chan roblesvirtualawlibraryHunt vs. Kansas & M. Bridge Co., 11 Kan. 412, 439; chan roblesvirtualawlibraryAspen Water & Light Co., vs. City of Aspen, 37 P. 728, 730, 6 Colo. App. 12; chan roblesvirtualawlibraryNemaha Coal & Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.

Under a statute providing that, until articles of incorporation should be recorded, the corporation should transact no business except its own organization, it is held that the term “organization” means simply the process of forming and arranging into suitable disposition the parties who are to act together in, and defining the objects of, the compound body, and that this process, even when complete in all its parts, does not confer a franchise either valid or defective, but, on the contrary, it is only the act of the individuals, and something else must be done to secure the corporate franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb. 416, 421.” (30 Words and Phrases, p. 282.)

It is apparent from the foregoing definitions that the term “organization” relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of thePetitioner Benguet, and has nothing to do with the prorogation of its corporate life.

From the double fact that the duration of its corporate life (and juridical personality) has evident connection with the Petitioner’s relations to the public, and that it bears none to the Petitioner’s organization and method of transacting business, we derive the conclusion that the prohibition contained in section 18 of the Corporation Law (Act No. 1459) against extension of corporate life by amendment of the original articles was designed and intended to apply to “compañias anonimas” that, like Petitioner Benguet, were already existing at the passage of said law. This conclusion is reinforced by the avowed policy of the law to hasten the day when compañias anonimas would be extinct, and replace them with the American type of corporation (Harden vs. Benguet Consolidated Mining Co., supra), for the indefinite prorogation of the corporation life of sociedades anonimas would maintain the unnecessary duality of organizational types instead of reducing them to a single one; chan roblesvirtualawlibraryand what is more, it would confer upon these sociedades anonimas, whose obsolescence was sought, the advantageous privilege of perpetual existence that the new corporation could not possess.

Of course, the retroactive application of the limitations on the terms of corporate existence could not be made in violation of constitutional inhibitions specially those securing equal protection of the laws and prohibiting impairment of the obligation of contracts. It needs no argument to show that if Act No. 1459 allowed existing compañias anonimas to be governed by the old law in respect to their organization, methods of transacting business and the rights of the members among themselves, it was precisely in deference to the vested rights already acquired by the entity and its members at the time the Corporation Law was enacted. But we do not agree withPetitioner Benguet (and here lies the second issue in this appeal) that the possibility to extend its corporate life under the Code of Commerce constituted a right already

vested when Act No. 1459 was adopted. At that time, Benguet’s existence was well within the 50 years period set in its articles of association; chan roblesvirtualawlibraryand its members had not entered into any agreement that such period should be extended. It is safe to say that none of the members of Benguet anticipated in 1906 any need to reach an agreement to increase the term of its corporate life, barely three years after it had started. The prorogation was purely speculative; chan roblesvirtualawlibrarya mere possibility that could not be taken for granted. It was as yet conditional, depending upon the ultimate decision of the members and directors. They might agree to extend Benguet’s existence beyond the original 50 years; chan roblesvirtualawlibraryor again they might not. It must be remembered that in 1906, the success of Benguet in its mining ventures was by no means so certain as to warrant continuation of its operations beyond the 50 years set in its articles. The records of this Court show that Benguet ran into financial difficulties in the early part of its existence, to the extent that, as late as 1913, ten years after it was found, 301,100 shares of its capital stock (with a par value of $1 per share) were being offered for sale at 25 centavos per share in order to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon vs. Hausermann and Beam, 40 Phil., 796). Certainly the prolongation of the corporate existence of Benguet in 1906 was merely a possibility in futuro, a contingency that did not fulfill the requirements of a vested right entitled to constitutional protection, defined by this Court in Balboa vs. Farrales, 51 Phil., 498, 502, as follows:chanroblesvirtuallawlibrary

“Vested right is ‘some right or interest in the property which has become fixed and established, and is no longer open to doubt or controversy,”

“A ‘vested’ right is defined to be an immediate fixed right of present or future enjoyment, and rights are ‘vested’ in


contradistinction to being expectant or contingent” (Pearsall vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).

In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary

“Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or persons as a present interest. The right must be absolute, complete, and unconditional, independent of a contingency, and a mere expectancy of future benefit, or a contingent interest in property founded on anticipated continuance of existing laws, does not constitute a vested right. So, inchoate rights which have not been acted on are not vested.” (16C.J. S. 214-215.)

Since there was no agreement as yet to extend the period of Benguet’s corporate existence (beyond the original 50 years) when the Corporation Law was adopted in 1906, neither Benguet nor its members had any actual or vested right to such extension at that time. Therefore, when the Corporation Law, by section 18, forbade extensions of corporate life, neither Benguet nor its members were deprived of any actual or fixed right constitutionally protected.

To hold, as Petitioner Benguet asks, that the legislative power could not deprive Benguet or its members of the possibility to enter at some indefinite future time into an agreement to extend Benguet’s corporate life, solely because such agreements were authorized by the Code of Commerce, would be tantamount to saying that the said Code was irrepealable on that point. It is a well settled rule that no person has a vested interest in any rule of law entitling him to insist that it shall remain unchanged for his benefit. (New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667; chan roblesvirtualawlibraryMondou vs. New York N. H. & H. R. Co., 56 L. Ed. 327; chan roblesvirtualawlibraryRainey vs. U. S., 58 L. Ed.

617; chan roblesvirtualawlibraryLilly Co. vs. Saunders, 125 ALR. 1308; chan roblesvirtualawlibraryShea vs. Olson, 111 ALR. 998).

“There can be no vested right in the continued existence of a statute or rule of the common law which precludes its change or repeal, nor in any omission to legislate on a particular matter or subject. Any right conferred by statute may be taken away by statute before it has become vested, but after a right has vested, repeal of the statute or ordinance which created the right does not and cannot affect much right.” (16 C.J. S. 222-223.)

It is a general rule of constitutional law that a person has no vested right in statutory privileges and exemptions” (Brearly School vs. Ward, 201 NY. 358, 40 LRA NS. 1215; chan roblesvirtualawlibraryalso, Cooley, Constitutional Limitations, 7th ed., p. 546).

It is not amiss to recall here that after Act No. 1459 the Legislature found it advisable to impress further restrictions upon the power of corporations to deal in public lands, or to hold real estate beyond a maximum area; chan roblesvirtualawlibraryand to prohibit any corporation from endeavouring to control or hold more than 15 per cent of the voting stock of an agricultural or mining corporation (Act No. 3518). These prohibitions are so closely integrated with our public policy that Commonwealth Act No. 219 sought to extend such restrictions to associations of all kinds. It would be subversive of that policy to enable Benguet to prolong its peculiar status of sociedad anonimas, and enable it to cast doubt and uncertainty on whether it is, or not, subject to those restrictions on corporate power, as it once endeavoured to do in the previous case of Harden vs. Benguet Mining Corp. 58 Phil., 149.

Stress has been laid upon the fact that the Compañia Maritima (like Benguet, a sociedad anonima established before the enactment of the Corporation Law) has been

twice permitted to extend its corporate existence by amendment of its articles of association, without objection from the officers of the defunct Bureau of Commerce and Industry, then in charge of the enforcement of the Corporation Laws, although the exact question was never raised then. Be that as it may, it is a well established rule in this jurisdiction that the government is never estopped by mistake or error on the part of its agents” (Pineda vs. Court of First Instance of Tayabas, 52 Phil., 803, 807), and that estopped cannot give validity to an act that is prohibited by law or is against public policy (Eugenio vs. Perdido, (97 Phil., 41, May 19, 1955; chan roblesvirtualawlibrary19 Am. Jur. 802); chan roblesvirtualawlibraryso that theRespondent, Securities and Exchange Commissioner, was not bound by the rulings of his predecessor if they be inconsistent with law. Much less could erroneous decisions of executive officers bind this Court and induce it to sanction an unwarranted interpretation or application of legal principles.

We now turn to the third and last issue of this appeal, concerning the exercise of the option granted by section 75 of the Corporation Law to every sociedad anonima “formed, organized and existing under the laws of the Philippines on the date of the passage of this Act” to either continue business as such sociedad anonima or to reform and organize under the provisions of the Corporation Law. Petitioner-Appellant Benguet contends that as the law does not determine the period within which such option may be exercised, Benguet may exercise it at any time during its corporate existence; chan roblesvirtualawlibraryand that in fact on June 22, 1953, it chose to reform itself into a corporation for a period of 50 years from that date, filing the corresponding papers and by-laws with the Respondent Commissioner of Securities and Exchange registration; chan roblesvirtualawlibrarybut the latter refused to accept them as belatedly made.


The Petitioner’s argument proceeds from the unexpressed assumption that Benguet, as sociedad anonima, had not exercised the option given by section 75 of the Corporation Law until 1953. This we find to be incorrect. Under that section, by continuing to do business as sociedad anonima, Benguet in fact rejected the alternative to reform as a corporation under Act No. 1459. It will be noted from the text of section 75 (quoted earlier in this opinion) that no special act or manifestation is required by the law from the existing sociedades anonimas that prefer to remain and continue as such. It is when they choose to reform and organize under the Corporation Law that they must, in the words of the section, “transfer all corporate interests to the new corporation”. Hence if they do not so transfer, the sociedades anonimas affected are to be understood to have elected the alternative “to continue business as such corporation” (sociedad anonima) 2

The election of Benguet to remain a sociedad anonima after the enactment of the Corporation Law is evidence, not only by its failure, from 1906 to 1953, to adopt the alternative to transfer its corporate interests to a new corporation, as required by section 75; chan roblesvirtualawlibraryit also appears from positive acts. Thus around 1933, Benguet claimed and defended in court its acquisition of shares of the capital stock of the Balatoc Mining Company, on the ground that as a sociedad anonima it (Benguet) was not a corporation within the purview of the laws prohibiting a mining corporation from becoming interested in another mining corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings, Benguet has urged its right to amend its original articles of association as “sociedad anonima” and extend its life as such under the provisions of the Spanish Code of Commerce. Such appeals to privileges as “sociedad anonima” under the Code of 1886 necessarily imply that Benguet has rejected the alternative of reforming under the Corporation Law.

As Respondent Commissioner’s order, now under appeal, has stated —

“A sociedad anonima could not claim the benefit of both, but must have to choose one and discard the other. If it elected to become a corporation it could not continue as a sociedad anonima; chan roblesvirtualawlibraryand if it choose to remain as a sociedad anonima, it could not become a corporation.”

Having thus made its choice, Benguet may not now go back and seek to change its position and adopt the reformation that it had formerly repudiated. The election of one of several alternatives is irrevocable once made (as now expressly recognized in article 940 of the new Civil Code of the Philippines):chanroblesvirtuallawlibrary such rule is inherent in the nature of the choice, its purpose being to clarify and render definite the rights of the one exercising the option, so that other persons may act in consequence. While successive choices may be provided there is nothing in section 75 of the Corporation Law to show or hint that a sociedad anonima may make more than one choice thereunder, since only one option is provided for.

While no express period of time is fixed by the law within which sociedades anonimas may elect under section 75 of Act No. 1459 either to reform or to retain their status quo, there are powerful reasons to conclude that the legislature intended such choice to be made within a reasonable time from the effectivity of the Act. To enable a sociedad anonima to choose reformation when its stipulated period of existence is nearly ended, would be to allow it to enjoy a term of existence far longer than that granted to corporations organized under the Corporation Law; chan roblesvirtualawlibraryin Benguet’s case, 50 years as sociedad anonima, and another 50 years as an American type of corporation under Act 1459; chan roblesvirtualawlibrarya result incompatible with the avowed purpose of the Act to hasten the disappearance of

the sociedades anonimas. Moreover, such belated election, if permitted, would enable sociedades anonimas to reap the full advantage of both types of organization. Finally, it would permit sociedades anonimas to prolong their corporate existence indirectly by belated reformation into corporations under Act No. 1459, when they could not do so directly by amending their articles of association.

Much stress is laid upon allegedly improper motives on the part of the intervenor, Consolidated Mines, Inc., in supporting the orders appealed from, on the ground that intervenor seeks to terminate Benguet’s operating contract and appropriate the profits that are the result of Benguet’s efforts in developing the mines of the intervenor. Suffice it to say that whatever such motives should be, they are wholly irrelevant to the issues in this appeal, that exclusively concern the legal soundness of the order of the Respondent Securities and Exchange Commissioner rejecting the claims of the Benguet Consolidated Mining Company to extend its corporate life.

Neither are we impressed by the prophesies of economic chaos that would allegedly ensure with the cessation of Benguet’s activities. If its mining properties are really susceptible of profitable operation, inexorable economic laws will ensure their exploitation; chan roblesvirtualawlibraryif, on the other hand, they can no longer be worked at a profit, then catastrophe becomes inevitable, whether or notPetitioner Benguet retains corporate existence.

Sustaining the opinions of the Respondent Securities and Exchange Commissioner and of the Secretary of Justice, we rule that:chanroblesvirtuallawlibrary

(1) The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate existence by amendment of the original articles, was intended to apply, and does apply, to sociedades anonimas already formed, organized and existing at the time of the


effectivity of the Corporation Law (Act No. 1459) in 1906;

(2) The statutory prohibition is valid and impairs no vested rights or constitutional inhibition where no agreement to extend the original period of corporate life was perfected before the enactment of the Corporation Law;

(3) A sociedad anonima, existing before the Corporation Law, that continues to do business as such for a reasonable time after its enactments, is deemed to have made its election and may not subsequently claim to reform into a corporation under section 75 of Act No. 1459.

In view of the foregoing, the order appealed from is affirmed. Costs against Petitioner-AppellantBenguet Consolidated Mining Company.

G.R. No. 22106 September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee, vs.STANDARD PRODUCTS, CO., INC., defendant-appellant.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the following promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at

their office in Manila, for value received, together with interest at the rate of ten per cent per annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC. By (Sgd.) GEORGE H. SEAVER

By President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and the costs. From this judgment the defendant appeals to this court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error.

There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is,

of course, also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances taking the case out of the rules stated.

The judgment appealed from is affirmed, with the costs against the appellant. So ordered.

G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner, vs.HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.

FELIX, J.:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or other crops


suitable to the soil; that the lessor would be entitled to 30 per cent of the net income accruing from the harvest of any, crop without being responsible for the cost of production thereof; and that after every harvest, the lessee was bound to declare at the earliest possible time the income derived therefrom and to deliver the corresponding share due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of the commencement of the action, already harvested, processed and sold by defendants; that notwithstanding that fact, defendants refused to render an accounting of the income derived therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It was further provide that upon defendants'

failure to abide by the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30 per cent of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties belonging to the movant that might have already been attached, after finding that the evidence on record made no mention or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the order complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such a motion may be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided for in either of the preceding sections of this rule must be verified, filed within sixty days after the petitioner learns of the judgment, order, or other proceeding to be set aside, and not more than six months after such judgment or order was entered, or such proceeding was taken; and must be must be accompanied with affidavit showing the fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting the petitioner is good and substantial cause of action or defense, as the case may be, which he may prove if his petition be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6 months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision or order is certainly an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to protect his interest. Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be granted. However, taking note of the question presented by the motion for relief involved herein, We deem it wise to delve in and pass upon the merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the obligation


imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that the complaint filed with the lower court contained no allegation which would hold him liable personally, for while it was stated therein that he was a signatory to the lease contract, he did so in his capacity as president of the corporation. And this allegation was found by the Court a quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending that her failure to specify defendant's personal liability was due to the fact that all the time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R.

No. 42420) and conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been attached in the execution of such judgment, is hereby set

aside and nullified as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered.

G.R. No. L-19118 January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant, vs.UNIVERSITY PUBLISHING CO., INC., defendant-appellee.

BENGZON, J.P., J.:

No less than three times have the parties here appealed to this Court.

In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled to damages (for breach of contract) but reduced the amount from P23,000.00 to P15,000.00.

Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that the judgment for P15,000.00 which had become final and executory, should be executed to its full amount, since in fixing it, payment already made had been considered.

Now we are asked whether the judgment may be executed against Jose M. Aruego, supposed President of University Publishing Co., Inc., as the real defendant.

Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co., Inc. Plaintiff allegedinter alia that defendant was a corporation duly organized and existing under the laws of the Philippines; that on July 19, 1948, defendant, through Jose M. Aruego, its President, entered into a contract with plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the exclusive right to publish his revised Commentaries on the Revised Penal Code and for his share in previous sales of the book's first edition; that


defendant had undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948; that per contract failure to pay one installment would render the rest due; and that defendant had failed to pay the second installment.

Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the execution and terms of the contract dated July 19, 1948; but alleged that it was plaintiff who breached their contract by failing to deliver his manuscript. Furthermore, defendant counterclaimed for damages.1äwphï1.ñët

Plaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for him.

The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating in the dispositive portion —

IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff and against the defendant the University Publishing Co., Inc., ordering the defendant to pay the administrator Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest from the date of the filing of this complaint until the whole amount shall have been fully paid. The defendant shall also pay the costs. The counterclaim of the defendant is hereby dismissed for lack of evidence.

As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full. Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution writ against University Publishing Co., Inc. Plaintiff, however, on August 10, 1961, petitioned for a writ of execution against Jose M. Aruego, as the real defendant, stating, "plaintiff's counsel and the Sheriff of Manila discovered that there is no such entity as University Publishing Co., Inc." Plaintiff annexed to his petition a certification from the securities and Exchange

Commission dated July 31, 1961, attesting: "The records of this Commission do not show the registration of UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." "University Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law firm), a "manifestation" stating that "Jose M. Aruego is not a party to this case," and that, therefore, plaintiff's petition should be denied.

Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through counsel, would not want Jose M. Aruego to be considered a party to the present case: should a separate action be now instituted against Jose M. Aruego, the plaintiff will have to reckon with the statute of limitations.

The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff has appealed.

The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange Commission has not been disputed. Defendant would only raise the point that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that "University Publishing Co., Inc." is an existing corporation with an independent juridical personality. Precisely, however, on account of the non-registration it cannot be considered a corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently.

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was "a corporation duly organized and existing under the laws of the Philippines," and obviously misled plaintiff (Mariano

A. Albert) into believing the same. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).

"University Publishing Co., Inc." purported to come to court, answering the complaint and litigating upon the merits. But as stated, "University Publishing Co., Inc." has no independent personality; it is just a name. Jose M. Aruego was, in reality, the one who answered and litigated, through his own law firm as counsel. He was in fact, if not, in name, the defendant.

Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent." Had Jose M. Aruego been named as party defendant instead of, or together with, "University Publishing Co., Inc.," there would be no room for debate as to his personal liability. Since he was not so named, the matters of "day in court" and "due process" have arisen.

In this connection, it must be realized that parties to a suit are "persons who have a right to control the proceedings, to make defense, to adduce and cross-examine witnesses, and to appeal from a decision" (67 C.J.S. 887) — and Aruego was, in reality, the person who had and exercised these rights. Clearly, then, Aruego had his day in court as the real defendant; and due process of law has been substantially observed.


By "due process of law" we mean " "a law which hears before it condemns; which proceeds upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this Court has said, " "Due process of law" contemplates notice and opportunity to be heard before judgment is rendered, affecting one's person or property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process" clause of the Constitution is designed to secure justice as a living reality; not to sacrifice it by paying undue homage to formality. For substance must prevail over form. It may now be trite, but none the less apt, to quote what long ago we said in Alonso vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing side as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that Justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party to the contract sued upon; that he was the one who reaped the benefits resulting from it, so much so that partial payments of the consideration were made by him; that he violated its terms, thereby precipitating the suit in question; and that in the litigation he was the real defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him.

We need hardly state that should there be persons who under the law are liable to Aruego for reimbursement or contribution with respect to the payment he makes under the judgment in question, he may, of course, proceed against them through proper remedial measures.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego. So ordered.

[G.R. No. 136448. November 3, 1999]

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

D E C I S I O N

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed.[2]

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter made by reason of the special and unique facts and circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiffs invoices and computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20,


http://sc.judiciary.gov.ph/jurisprudence/1999/nov99/136448.htm#_edn2


1990 (date of attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats. Considering, however, that the total judgment obligation as computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the defendants who are not entitled to damages and who did not put up a single

centavo to raise the amount of P900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason, the defendants are hereby relieved from any and all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the Corporation.[4]

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission.[5] On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a

reasonable time within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds of P900,000.[7]

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent.[8]

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the three[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.[10] The Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever will be the










excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.[11]

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability could be presumed from the equal distribution of the profit and loss.[12]

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a partnership for a specific undertaking, that is for commercial fishing x x x. Obviously, the ultimate undertaking of the defendants was to divide the profits among themselves which is what a partnership essentially is x x x. By a contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves (Article 1767, New Civil Code).[13]

Hence, petitioner brought this recourse before this Court.[14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIMS GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats purchased from respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

This Courts Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the

respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership -- the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:

Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the following factual findings:[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while Antonio Chua was already Yaos partner;

(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus Lim;







(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership in the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioners brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term common fund under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed

that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the proceeds from the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present action is embraced by one of the exceptions to the rule.[16] In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership was the Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise all relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored all the possible consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts factual findings mentioned above nullified petitioners argument that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the partnership. It is not



uncommon to register the properties acquired from a loan in the name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him. Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. The reason behind this doctrine is obvious - an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those

who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent.[17]

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The only question here is whether petitioner should be held jointly[18]liable with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name does not appear on any of the

contracts and since he never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:[19]

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position , entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.





Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats were specifically manufactured and tailor-made according to their own design, and were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.

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

SO ORDERED.

G.R. No. 89561 September 13, 1990

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA, petitioners, vs.COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC., respondents.

REGALADO, J.:

This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in CA-GR CV No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co., Inc., et al.," 1the dispositive portion whereof provides:

WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as it is hereby REVERSED. In lieu thereof, a judgment is hereby rendered-

1) Dismissing the complaint, with cost against plaintiffs;

2) Ordering plaintiffs-appellees to vacate the subject properties; and

3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:

a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits in the subject parcels of land of which they were deprived in the sum of P26,000.00 and (ii) attorney's fees of P15,000.00

b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of P5,000.00 and (ii) attorney's fees of P15,000.00.

SO ORDERED.

The original complaint for annulment of title filed in the court a quo by herein petitioners included as party defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera). A Second Amended Complaint was filed, this time impleading Santiago M. Rivera as party plaintiff.

During the pre-trial conference, the parties entered into the following stipulation of facts:

As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of the estate of Felipe Castillo in Special Proceeding No. 4053, pending before Branch IX, CFI of Quezon (per Exhibit A) which intestate proceedings was instituted by Mauricia Meer Vda. de

Castillo, the previous administratrix of the said proceedings prior to 1970 (per exhibits A-1 and A-2) which case was filed in Court way back in 1964;

b) The four (4) parcels of land described in paragraph 3 of the Complaint were originally covered by TCT No. T-42104 and Tax Dec. No. 14134 with assessed value of P3,100.00; TCT No. T 32227 and Tax Dec. No. 14132, with assessed value of P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed value of P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with assessed value of P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3

c) That the above-enumerated four (4) parcels of land were the subject of the Deed of Extra-Judicial Partition executed by the heirs of Felipe Castillo (per Exhibit D) and by virtue thereof the titles thereto has (sic) been cancelled and in lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of her children, namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina, all surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit E ); TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No. T13117 (Exhibit H )

d) That mentioned parcels of land were submitted as guaranty in the Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage executed on 24 October 1970 between Insurance Corporation of the Philippines and Slobec Realty Corporation represented by Santiago Rivera (Exhibit 1);

e) That based on the Certificate of Sale issued by the Sheriff of the Province of Quezon in favor of Insurance Corporation of the Philippines it was able to transfer to itself the titles over the lots in question, namely: TCT No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT No. T 23708 (Exhibit P);


f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM Parts the immovables in question (per Exhibit 6 for PM Parts) and by reason thereof, succeeded in transferring unto itself the titles over the lots in dispute, namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847 (Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );

g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto N. Cervantes stating that she and her children refused to comply with his demands (Exhibit V-2);

h) That from at least the months of October, November and December 1970 and January 1971, Modesto N. Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and also he is one of the Board of Directors of PM Parts; on the other hand, Atty. Martin M. De Guzman was the legal counsel of Bormaheco, Inc., later Executive Vice-President thereof, and who also is the legal counsel of Insurance Corporation of the Philippines and PM Parts; that Modesto N. Cervantes served later on as President of PM Parts, and that Atty. de Guzman was retained by Insurance Corporation of the Philippines specifically for foreclosure purposes only;

i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and Development, Inc., represented by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial No. 281114 evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.;

j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured by an Agreement with Counter-Guaranty with Real Estate Mortgage executed by Slobec Realty & Development, Inc., Mauricia Castillo Meer, Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta Castillo and Leovina Castillo, as mortgagors in favor of ICP which document was executed and ratified

before notary public Alberto R. Navoa of the City of Manila on October 24,1970;

k) That the property mortgaged consisted of four (4) parcels of land situated in Lucena City and covered by TCT Nos. T-13114, T13115, T-13116 and T-13117 of the Register of Deeds of Lucena City;

l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was delivered to Bormaheco, Inc. on or about October 2,1973, by Mr. Menandro Umali for purposes of repair;

m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership and the assignment of Mr. Petronilo Roque as caretaker of the subject property;

n) That plaintiff and other heirs are harvest fruits of the property (daranghita) which is worth no less than Pl,000.00 per harvest.

As between plaintiffs and defendant Bormaheco, Inc

o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of the Slobec Realty & Development Corporation executed in favor of Bormaheco, Inc., represented by its Vice-President Modesto N. Cervantes a Chattel Mortgage concerning one unit model CAT D7 Caterpillar Crawler Tractor as described therein as security for the payment in favor of the mortgagee of the amount of P180,000.00 (per Exhibit K) that Id document was superseded by another chattel mortgage dated January 23, 1971 (Exhibit 15);

p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its Vice-President Modesto Cervantes and Slobec Realty Corporation represented by Santiago Rivera executed the sales agreement concerning the sale of one (1) unit Model CAT

D7 Caterpillar Crawler Tractor as described therein for the amount of P230,000.00 (per Exhibit J) which document was superseded by the Sales Agreement dated January 23,1971 (Exhibit 16);

q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K) that it was executed on 25 November 1970, and in the document entitled Sales Agreement (per Exhibit J) that it was executed on 18 December 1970, it appears in the notarial register of the notary public who notarized them that those two documents were executed on 11 December 1970. The certified xerox copy of the notarial register of Notary Public Guillermo Aragones issued by the Bureau of Records Management is hereto submitted as Exhibit BB That said chattel mortgage was superseded by another document dated January 23, 1971;

r) That on 23 January 1971, Slobec Realty Development Corporation, represented by Santiago Rivera, received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant to Invoice No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for Bormaheco, Inc

s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation of the Philippines purchased at public auction for said corporation the four (4) parcels of land subject of tills case (per Exhibit L), and which document was presented to the Register of Deeds on 1 October 1973;

t) Although it appears that the realties in issue has (sic) been sold by Insurance Corporation of the Philippines in favor of PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly Vice- President and now President of Bormaheco, Inc., sent his letter dated 9 August 1976 to Mauricia Meer Vda. de Castillo (Exhibit V), demanding that she and her children should vacate the premises;


u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty Development Corporation was actually reconditioned and repainted. " 2

We cull the following antecedents from the decision of respondent Court of Appeals:

Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are the owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Bank of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by the Castillo family and to carry out the project, a Memorandum of Agreement (Exh. U p. 127, Record) was executed by and between Slobec Realty and Development, Inc., represented by its President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the agreement and to pay the additional amount of P400,000.00 after the property has been converted into a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr. Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales Agreement was executed on December 28,1970 (Exh. J, p. 22, Record).

On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as evidenced by the contract marked Exhibit '16'. As shown by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a down payment, and the

balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said equipment as security for the payment of the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the properties in question, namely, four parcels of land covered by TCTs in the name of the aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of the Register of Deeds for Lucena City.

On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16', Slobec, represented by Rivera received from Bormaheco the subject matter of the said Sales Agreement, namely, the aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-A, p. 113). This tractor was known by Rivera to be a reconditioned and repainted one [Stipulation of Facts, Pre-trial Order, par. (u)].

Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh. 1), the properties of the Castillos were foreclosed by ICP As the highest

bidder with a bid of P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the Register of Deeds of Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708 (Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of the registration of the certificate of sale, that is, until October 1, 1974, to redeem the property, but they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of land through the requisite affidavit of consolidation of ownership dated October 29, 1974, as shown in Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).

On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in dispute so that said parcels of land are now covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).

Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply with his demands.

On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the properties in question filed an action for annulment of title before the then Court of First Instance of Quezon and docketed thereat as Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444, Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading Santiago M. Rivera as a


party plaintiff (p. 706, Record). They contended that all the aforementioned transactions starting with the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale (Annexes J, K, L and M) are void for being entered into in fraud and without the consent and approval of the Court of First Instance of Quezon, (Branch IX) before whom the administration proceedings has been pending. Plaintiffs pray that the four (4) parcels of land subject hereof be declared as owned by the estate of the late Felipe Castillo and that all Transfer Certificates of Title Nos. 13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847, 24848 and 24849 as well as those appearing as encumbrances at the back of the certificates of title mentioned be declared as a nullity and defendants to pay damages and attorney's fees (pp. 71071 1, Record).

In their amended answer, the defendants controverted the complaint and alleged, by way of affirmative and special defenses that the complaint did not state facts sufficient to state a cause of action against defendants; that plaintiffs are not entitled to the reliefs demanded; that plaintiffs are estopped or precluded from asserting the matters set forth in the Complaint; that plaintiffs are guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an innocent purchaser for value and relied on the face of the title before it bought the subject property (p. 744, Record). 3

After trial, the court a quo rendered judgment, with the following decretal portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, declaring the following documents:

Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October 24,1970 (Exhibit 1);

Sales Agreement dated December 28, 1970 (Exhibit J)

Chattel Mortgage dated November 25, 1970 (Exhibit K)

Sales Agreement dated January 23, 1971 (Exhibit 16);

Chattel Mortgage dated January 23, 1971 (Exhibit 17);

Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of Quezon in favor of Insurance Corporation of the Philippines (Exhibit L);

null and void for being fictitious, spurious and without consideration. Consequently, Transfer Certificates of Title Nos. T 23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance Corporation of the Philippines, are likewise null and void.

The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine Machinery Parts Manufacturing Co., Inc., over Id four (4) parcels of land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and T-24849 subsequently issued by virtue of said sale in the name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly declared null and void, and the Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof, transfer certificates of title in the names of the plaintiffs, except Santiago Rivera.

Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of P10,000.00, exemplary damages in the amount of P5,000.00, and actual litigation expenses in the sum of P6,500.00.

Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of P10,000.00 for and as attomey's fees. With costs against the defendants.

SO ORDERED. 4

As earlier stated, respondent court reversed the aforequoted decision of the trial court and rendered the judgment subject of this petition-

Petitioners contend that respondent Court of Appeals erred:

1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes are all fair and regular and therefore binding between the parties thereto;

2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts, erroneous presumptions not supported by the evidence on record but also, holding valid and binding the supposed payment by ICP of its obligation to Bormaheco, despite the fact that the surety bond issued it had already expired when it opted to foreclose extrajudically the mortgage executed by the petitioners;

3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate existence; and

4. In reversing the decision of the lower court of affirming the same 5

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun and void. Such allegation is premised primarily on the fact that contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never made any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor was received by Rivera only on January 23, 1971


and not in 1970 as stated in the Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety bond, the Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the fact that it was Bormaheco, and not Rivera, which paid the premium for the surety bond issued by ICP

At the outset, it will be noted that petitioners submission under the first assigned error hinges purely on questions of fact. Respondent Court of Appeals made several findings to the effect that the questioned documents are valid and binding upon the parties, that there was no fraud employed by private respondents in the execution thereof, and that, contrary to petitioners' allegation, the evidence on record reveals that petitioners had every intention to be bound by their undertakings in the various transactions had with private respondents. It is a general rule in this jurisdiction that findings of fact of said appellate court are final and conclusive and, thus, binding on this Court in the absence of sufficient and convincing proof, inter alia, that the former acted with grave abuse of discretion. Under the circumstances, we find no compelling reason to deviate from this long-standing jurisprudential pronouncement.

In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement, which clearly constitutes a breach of the contract, cannot be availed of by the guilty party to justify and support an action for the declaration of nullity of the contract. Equity and fair play dictates that one who commits a breach of his contract may not seek refuge under the protective mantle of the law.

The evidence of record, on an overall calibration, does not convince us of the validity of petitioners' contention that the contracts entered into by the parties are either absolutely simulated or downright fraudulent.

There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound at all by the same. 9 The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be bound by these contracts. The occurrence of these series of transactions between petitioners and private respondents is a strong indication that the parties actually intended, or at least expected, to exact fulfillment of their respective obligations from one another.

Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were induced to enter into a contract through the insidious words and machinations of private respondents without which the former would not have executed such contract. To set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and convincing. 10 We are not persuaded that such quantum of proof exists in the case at bar.

The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per se affect the validity of the bond. Petitioners themselves admit in their present petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco and agreed that a part of the proceeds thereof shall be used to pay the premium for the bond. 11 In effect, Bormaheco accepted the payment of the premium as an agent of ICP The execution of the deed of sale with a right of repurchase in favor of Bormaheco under such

circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of ICP Such payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped from questioning the validity of the suretyship contract.

II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. 12 The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, 13 or when it is made as a shield to confuse the legitimate issues 14 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. 15

In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners While we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar.

In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. In the


instant case, petitioners do not seek to impose a claim against the individual members of the three corporations involved; on the contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, 16 absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.

III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged properties by ICP Petitioners argue that the foreclosure proceedings should be declared null and void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP anent the failure of Slobec in paying its obligation with the former, plus the fact that no receipt was presented to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had already expired.

Respondent court, in finding for the validity of the foreclosure sale, declared:

Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage was in the exercise of a legal right, We agree with the appellants that the foreclosure proceedings instituted by the ICP was in the exercise of a legal right. First, ICP has in its favor the legal presumption that it had indemnified Bormaheco by reason of Slobec's default in the payment of its obligation under the Sales Agreement, especially because Bormaheco consented to ICPs foreclosure of the mortgage. This presumption is in consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court which provides that it is disputably presumed that private transactions have been fair and regular. likewise, it is disputably presumed that the ordinary course of business has been followed: Second, ICP had the right to proceed at once to the foreclosure of the mortgage as mandated by the provisions of Art. 2071 Civil Code for these further reasons: Slobec, the principal debtor, was admittedly insolvent; Slobec's obligation becomes demandable by reason of the expiration of the period of payment; and its authorization to foreclose the mortgage upon Slobec's default, which resulted in the accrual of ICPS liability to Bormaheco. Third, the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1) expressly grants to ICP the right to foreclose the real estate mortgage in the event of 'non-payment or non-liquidation of the entire indebtedness or fraction thereof upon maturity as stipulated in the contract'. This is a valid and binding stipulation in the absence of showing that it is contrary to law, morals, good customs, public order or public policy. (Art. 1306, New Civil Code). 17

1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which would have entitled Bormaheco to demand payment from ICP under the suretyship contract.

Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and Slobec undertook

to guarantee the payment of the balance of P180,000.00 payable in eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides in part as follows:

1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will expire Twelve (I 2) months from date hereof. Furthermore, it is hereby agreed and understood that the INSURANCE CORPORATION OF THE PHILIPPINES will not be liable for any claim not presented in writing to the Corporation within THIRTY (30) DAYS from the expiration of this BOND, and that the obligee hereby waives his right to bring claim or file any action against Surety and after the termination of one (1) year from the time his cause of action accrues. 18

The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971." 19

On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00 shall be payable in eighteen (18) monthly installments. 20 The Promissory Note executed by Slobec on even date in favor of Bormaheco further provides that the obligation shall be payable on or before February 23, 1971 up to July 23, 1972, and that non-payment of any of the installments when due shall make the entire obligation immediately due and demandable. 21

It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. We have repeatedly held that the extent of a surety's liability is determined only by the clause of the contract of suretyship as well as the conditions stated in the bond. It cannot be extended by implication beyond the terms the contract. 22


Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or notice of default is not required to fix the surety's liability. 23 Hence, where the contract of suretyship stipulates that notice of the principal's default be given to the surety, generally the failure to comply with the condition will prevent recovery from the surety. There are certain instances, however, when failure to comply with the condition will not extinguish the surety's liability, such as a failure to give notice of slight defaults, which are waived by the obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the suretyship contract exempting the surety for liability therefor, or where the surety already has knowledge or is chargeable with knowledge of the default. 24

In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any claim not filed in writing within thirty (30) days from the expiration of the bond. In its decision dated May 25 1987, the court a quocategorically stated that '(n)o evidence was presented to show that Bormaheco demanded payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim exemption from the required written notice since its case does not fall under any of the exceptions hereinbefore enumerated.

Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any documentary

evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly prove the fact of payment, the disputable presumption that private transactions have been fair and regular, as erroneously relied upon by respondent Court of Appeals, finds no application to the case at bar.

2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent thereof, such liability is strictly limited to that assumed by its terms. 26 While ordinarily the termination of a surety's liability is governed by the provisions of the contract of suretyship, where the obligation of a surety is, under the terms of the bond, to terminate at a specified time, his obligation cannot be enlarged by an unauthorized extension thereof. 27 This is an exception to the general rule that the obligation of the surety continues for the same period as that of the principal debtor. 28

It is possible that the period of suretyship may be shorter than that of the principal obligation, as where the principal debtor is required to make payment by installments. 29 In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (1 2) months from its effectivity date, whereas Slobec's installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the balance of P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date of effectivity of the surety bond, or until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec became an unsecured obligation. The default of Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety contract had already been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a written claim against it within thirty (30) days from the expiration of the surety bond. Consequently, the

foreclosure of the mortgage, after the expiration of the surety bond under which ICP as surety has not incurred any liability, should be declared null and void.

3. Lastly, it has been held that where The guarantor holds property of the principal as collateral surety for his personal indemnity, to which he may resort only after payment by himself, until he has paid something as such guarantor neither he nor the creditor can resort to such collaterals. 30

The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for and in consideration of the obligations assumed by the Mortgagee-Surety Company under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development Corporation and in favor of Bormaheco, Inc. 31 There is no doubt that said Agreement of Counter-Guaranty is issued for the personal indemnity of ICP Considering that the fact of payment by ICP has never been established, it follows, pursuant to the doctrine above adverted to, that ICP cannot foreclose on the subject properties,

IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a valid title over the subject properties. The submission is without merit and the conclusion is specious

We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable in this case. However, its inapplicability has no bearing on the good faith or bad faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the Executive Vice-President of Bormaheco, was also the legal counsel of ICP


and PM Parts. These facts were admitted without qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the defense of good faith may not be resorted to by private respondent PM Parts which is charged with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title issued in its name, as well as the certificate of sale, must be declared null and void since they cannot be considered altogether free of the taint of bad faith.

WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and judgment is hereby rendered declaring the following as null and void: (1) Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land covered by the aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T-24848 and T24849 subsequently issued by virtue of said sale in the name of the latter corporation.

The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of title in the name of herein petitioners, except Santiago Rivera.

The foregoing dispositions are without prejudice to such other and proper legal remedies as may be available to respondent Bormaheco, Inc. against herein petitioners.

SO ORDERED.

G.R. No. L-47673 October 10, 1946

KOPPEL (PHILIPPINES), INC., plaintiff-appellant, vs.ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.

HILADO, J.:

This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance of Manila in civil case No. 51218 of said court dismissing said corporation's complaint for the recovery of the sum of P64,122.51 which it had paid under protest to the Collector of Internal Revenue on October 30, 1936, as merchant sales tax. The main facts of the case were stipulated in the court below as follows:

AGREED STATEMENT OF FACTS

Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the Solicitor General and undersigned Assistant Attorney of the Bureau of Justice and, with leave of this Honorable Court, hereby respectfully stipulated and agree to the following facts, to wit:

I. That plaintiff is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office therein at the City of Manila, the capital stock of which is divided into thousand (1,000) shares of P100 each. The Koppel Industrial Car and Equipment company, a corporation organized and existing under the laws of the State of Pennsylvania, United States of America, and not licensed to do business in the Philippines, owned nine hundred and ninety-five (995) shares out of the total capital stock of the plaintiff from the year 1928 up to and including the year 1936, and the remaining five (5) shares only were and are owned one each by officers of the plaintiff corporation.

II. That plaintiff, at all times material to this case, was and now is duly licensed to engage in business as a merchant and commercial broker in the Philippines; and was and is the holder of the corresponding merchant's and commercial broker's privilege tax receipts.

III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.

IV. That during the period from January 1, 1929, up to and including December 31, 1932, plaintiff transacted business in the Philippines in the following manner, with the exception of the transactions which are described in paragraphs V and VI of this stipulation:

When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for price quotations from plaintiff. Atypical form of such request is attached hereto and made a part hereof as Exhibit A. (Exhibit A represents typical transactions arising from written requests for quotations, while Exhibits B to G, inclusive, are typical transactions arising from verbal requests for quotation.) Plaintiff then cabled for the quotation desired for Koppel Industrial Car and Equipment Company. A sample of the pertinent cable is hereto attached and made a part hereof as Exhibit B. Koppel Industrial Car and Equipment Company answered by cable quoting its cost price, usually A. C. I. F. Manila cost price, which was later followed by a letter of confirmation. A sample of the said cable quotation and of the letter of confirmation are hereto attached and made a part hereof as Exhibits C and C-1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment Company. Copy of the plaintiff's letter to purchaser is hereto attached and made a part hereof as Exhibit D. On the basis of these quotations, orders were placed by the local purchasers, copies of which orders are hereto attached as Exhibits E and E-1.


A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the merchandise to Manila forwarding the customer's order. Sample of said cable is hereto attached as Exhibit F. The bills of lading were usually made to "order" and indorsed in blank with notation to the effect that the buyer be notified of the shipment of the goods covered in the bills of lading; commercial invoices were issued by Koppel Industrial Car and Equipment Company in the names of the purchasers and certificates of insurance were likewise issued in their names, or in the name of Koppel Industrial Car and Equipment Company but indorsed in blank and attached to drafts drawn by Koppel Industrial Car and Equipment Company on the purchasers, which were forwarded through foreign banks to local banks. Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2 and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed, but said Exhibits I-1, I-2 and I-3 have no connection with the transaction covered by Exhibits B to G, inclusive. The purchasers secured the shipping papers by arrangement with the banks, and thereupon received and cleared the shipments. If the merchandise were of European origin, and if there was not sufficient time to forward the documents necessary for clearance, through foreign banks to local banks, to the purchasers, the Koppel Industrial Car and Equipment company did, in many cases, send the documents directly from Europe to plaintiff with instructions to turn these documents over to the purchasers. In many cases, where sales was effected on the basis of C. I. F. Manila, duty paid, plaintiff advanced the sums required for the payment of the duty, and these sums, so advanced, were in every case reimbursed to plaintiff by Koppel Industrial Car and Equipment Company. The price were payable by drafts agreed upon in each case and drawn by Koppel Industrial Car and Equipment Company on respective purchasers through local banks, and payments were made to the banks by the purchasers on presentation and delivery to them of the above-mentioned shipping documents or

copies thereof. A sample of said drafts is hereto attached as Exhibit G. Plaintiff received by way of compensation a percentage of the profits realized on the above transactions as fixed in paragraph 6 of the plaintiff's contract with Koppel Industrial Car and Equipment Company, which contract is hereto attached as Exhibit H, and suffered its corresponding share in the losses resulting from some of the transactions.

That the total gross sales from January 1, 1929, up to and including December 31, 1932, effected in the foregoing manner and under the above specified conditions, amount to P3, 596,438.84.

V. That when a local sugar central was interested in the purchase of railway materials, machinery and supplies, it secured quotations from, and placed the corresponding orders with, the plaintiff in substantially the same manner as outlined in paragraph IV of this stipulation, with the only difference that the purchase orders which were agreed to by the central and the plaintiff are similar to the sample hereto attached and made a part hereof as Exhibit I. Typical samples of the bills of lading covering the herein transaction are hereto attached and made a part hereto as Exhibits I-1, I-2 and I-3. The value of the sales carried out in the manner mentioned in this paragraph is P133,964.98.

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, placed an option with Koppel Industrial Car and Equipment Company, through plaintiff, to purchase within three months a pair of Atlas-Diesel Marine Engines. Koppel Industrial Car and Equipment Company purchased said Diesel Engines in Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of $16,508.32 on the Koppel Industrial Car and Equipment Company, which paid the amount covered by the draft. Later, Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial Car and Equipment Company could not ship to or draw on said Mr. Miguel J.

Ossorio, it in turn drew another draft on plaintiff for the same amount at six months sight, with the understanding that Koppel Industrial Car and Equipment Company would reimburse plaintiff when said engines were disposed of. Plaintiff honored the draft and debited the said sum of $16,508.32 to merchandise account. The engines were left stored at Stockholm, Sweden. On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for $21,000 (P42,000) C. I. F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000 was drawn by Koppel Industrial Car and Equipment Company on Mr. Cesar Barrios. After the draft was fully paid by Mr. Barrios, Koppel Industrial Car and Equipment Company reimbursed plaintiff with cost price of $16,508.32 and credited it with $1,152.95 as its share of the profit on the transaction. Exhibits J and J-1 are herewith attached and made integral parts of this stipulation with particular reference to paragraph VI hereof.

VII. That plaintiff's share in the profits realized out of these transactions described in paragraphs IV, V and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and that plaintiff within the time provided by law returned the aforesaid amount P132,201.30 for the purpose of the commercial broker's 4 per cent tax and paid thereon the sum P5,288.05 as such tax.

VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants' sales tax of 1% per cent on the amount of P3,772,403.82, representing the total gross value of the sales mentioned in paragraphs IV, V and VI hereof, including the 25 per cent surcharge for the late payment of the said tax, which tax and surcharge were determined after the amount of P5,288.05 mentioned in paragraph VI hereof was deducted.


IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in order to avoid further penalties, levy and distraint proceedings.

X. That defendant, on November 10, 1936, overruled plaintiff's protest, and defendant has failed and refused and still fails and refuses, notwithstanding demands by plaintiff, to return to the plaintiff said sum of P64,122.51 or any part thereof.

x x x x x x x x x

That the parties hereby reserve the right to present additional evidence in support of their respective contentions.

Manila, Philippines, December 26, 1939

(Sgd.) ROMAN OZAETA Solicitor General

(Sgd.) ANTONIO CAÑIZARES Assistant Attorney

(Sgd.) E. P. REVILLA Attorney for the Plaintiff 3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification of or addition to their agreed statement of facts. A preponderance of evidence has established, besides the facts thus stipulated, the following:

(a) The shares of stock of plaintiff corporation were and are all owned by Koppel Industries Car and Equipment Company of Pennsylvania, U. S. A., exceptive which were necessary to qualify the Board of Directors of said plaintiff corporation;

(b) In the transactions involved herein the plaintiff corporation acted as the representative of Koppel

Industrial Car and Equipment Company only, and not as the agent of both the latter company and the respective local purchasers — plaintiff's principal witness, A.H. Bishop, its resident Vice-President, in his testimony invariably referred to Koppel Industrial Car and Equipment Co. as "our principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of page 10 to the top of page 11, the witness stated that they had "several principal" abroad but that "our principal abroad was, for the years in question, Koppel Industrial Car and Equipment Company," and on page 68, he testified that what he actually said was ". . . but our principal abroad" and not "our principal abroad" — as to which it is very significant that neither this witness nor any other gave the name of even a single other principal abroad of the plaintiff corporation;

(c) The plaintiff corporation bore alone incidental expenses — as, for instance, cable expenses-not only those of its own cables but also those of its "principal" (t.s.n., pp. 52, 53);

(d) the plaintiff's "share in the profits" realized from the transactions in which it intervened was left virtually in the hands of Koppel Industrial Car and Equipment Company (t.s.n., p. 51);

(e) Where drafts were not paid by the purchasers, the local banks were instructed not to protest them but to refer them to plaintiff which was fully empowered by Koppel Industrial Car and Equipment company to instruct the banks with regards to disposition of the drafts and documents (t.s.n., p. 50; Exhibit G);lawphil.net

(f) Where the goods were European origin, consular invoices, bill of lading, and, in general, the documents necessary for clearance were sent directly to plaintiff (t.s.n., p. 14);

(g) If the plaintiff had in stock the merchandise desired by local buyers, it immediately filled the orders of such local buyers and made delivery in the Philippines without the necessity of cabling its principal in America either for price quotations or confirmation or rejection of that agreed upon between it and the buyer (t.s.n., pp. 39-43);

(h) Whenever the deliveries made by Koppel Industrial Car and Equipment Company were incomplete or insufficient to fill the local buyer's orders, plaintiff used to make good the deficiencies by deliveries from its own local stock, but in such cases it charged its principal only the actual cost of the merchandise thus delivered by it from its stock and in such transactions plaintiff did not realize any profit (t.s.n., pp. 53-54);

(i) The contract of sale involved herein were all perfected in the Philippines.

Those described in paragraph IV of the agreed statement of facts went through the following process: (1) "When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for price quotations from plaintiff"; (2) "Plaintiff then cabled for the quotation desired from Koppel Industrial Car and Equipment Company"; (3) "Plaintiff, however, quoted to the purchaser a selling price above the figures quoted by Koppel Industrial Car and Equipment Company"; (4) "On the basis of these quotations, orders were placed by the local purchasers . . ."

Those described in paragraph V of said agreed statement of facts were transacted "in substantially the same manner as outlined in paragraph IV."

As to the single transaction described in paragraph VI of the same agreed statement of facts, discarding the Ossorio option which anyway was called off, "On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for


$21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).

(j) Exhibit H contains the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a broker as set forth above, and shall not take possession of any of the materials or equipment applying to said orders or perform any acts or duties outside the scope of a broker; and in no sense shall this contract be construed as granting to the broker the power to represent the principal as its agent or to make commitments on its behalf.

The Court of First Instance held for the defendant and dismissed plaintiff's complaint with costs to it.

Upon this appeal, seven errors are assigned to said judgment as follows:.

1. That the court a quo erred in not holding that appellant is a domestic corporation distinct and separate from, and not a mere branch of Koppel Industrial Car and Equipment Co.;

2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated January 31, 1931, Exhibit M;

3. the court a quo erred in not holding that a character of a broker is determined by the nature of the transaction and not by the basis or measure of his compensation;

4. The court a quo erred in not holding that appellant acted as a commercial broker in the transactions covered under paragraph VI of the agreed statement of facts;

5. The court a quo erred in not holding that appellant acted as a commercial broker in the transactions covered under paragraph v of the agreed statement of facts;

6. The court a quo erred in not holding that appellant acted as a commercial broker in the sole transaction covered under paragraph VI of the agreed statement of facts;

7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach ("hechura") of Koppel industrial Car and Equipment Company. The lower court did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, but in effect its conclusion was that, in the transactions involved herein, the public interest and convenience would be defeated and what would amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction."

I. In its first assignment of error appellant submits that the trial court erred in not holding that it is a domestic corporation distinct and separate from and not a mere branch of Koppel Industrial Car and Equipment Company. It contends that its corporate existence as Philippine corporation can not be collaterally attacked and that the Government is estopped from so doing. As stated above, the lower court did not deny legal personality to appellant for any and all purposes, but held in effect that in the transaction involved in this case the public interest and convenience would be defeated and what would amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction." In other words, in looking through the corporate form to the ultimate person or corporation behind that form, in the particular transactions which were involved in the case submitted to its determination and judgment, the court did so in order to prevent the contravention of the local internal revenue laws, and the perpetration of what would amount to a tax evasion, inasmuch as it considered — and in our opinion, correctly — that appellant Koppel (Philippines), Inc. was a mere branch or agency or dummy

("hechura") of Koppel Industrial Car and Equipment Co. The court did not hold that the corporate personality of Koppel (Philippines), Inc., would also be disregarded in other cases or for other purposes. It would have had no power to so hold. The courts' action in this regard must be confined to the transactions involved in the case at bar "for the purpose of adjudging the rights and liabilities of the parties in the case. They have no jurisdiction to do more." (1 Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section 41.)

A leading and much cited case puts it as follows:

If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convinience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. (1 Fletcher Cyclopedia of Corporation [Permanent Edition], pp. 135, 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255, per Sanborn, J.)

In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or subsidiary of Koppel Industrial Car and Equipment Co., a Pennsylvania corporation not licensed to do business in the Philippines but actually doing business here through the plaintiff; that the said foreign corporation holds 995 of the 1,000 shares of the plaintiff's capital stock, the remaining five shares being held by the officers of the plaintiff herein in order to permit the incorporation thereof and to enable its aforesaid officers to act as directors of the plaintiff corporation; and that plaintiff was organized as a Philippine corporation for the purpose of evading the payment by its parent foreign corporation of merchants' sales tax on the transactions involved in this case and others of similar nature."


By most courts the entity is normally regarded but is disregarded to prevent injustice, or the distortion or hiding of the truth, or to let in a just defense. (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, pp. 139,140; emphasis supplied.)

Another rule is that, when the corporation is the mere alter ego, or business conduit of a person, it may de disregarded." (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, p. 136.)

Manifestly, the principle is the same whether the "person" be natural or artificial.

A very numerous and growing class of cases wherein the corporate entity is disregarded is that (it 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)." (1 Fletcher, Cyclopedia of Corporation, Permanent ed., pp. 154, 155.)

While we recognize the legal principle that a corporation does not lose its entity by the ownership of the bulk or even the whole of its stock, by another corporation (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is equally well settled and ignore corporate forms." (Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)

Where it appears that two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat them as identical. (Abney vs. Belmont Country Club Properties, Inc., 279 Pac., 829.)

. . . the legal fiction of distinct corporate existence will be disregarded in a case where a corporation is so organized and controlled and its affairs are so conducted, as to make

it merely an instrumentality or adjunct of another corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed., 665.)

In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme Court of the United States disregarded the artificial personality of the subsidiary coal company in order to avoid that the parent corporation, the Lehigh Valley R. Co., should be able, through the fiction of that personality, to evade the prohibition of the Hepburn Act against the transportation by railroad companies of the articles and commodities described therein.

Chief Justice White, speaking for the court, said:

. . . Coming to discharge this duty it follows, in view of the express prohibitions of the commodities clause, it must be held that while the right of a railroad company as a stockholder to use its stock ownership for the purpose of a bona fide separate administration of the affairs of a corporation in which it has a stock interest may not be denied, the use of such stock ownership in substance for the purpose of destroying the entity of a producing, etc., corporation, and commingling its affairs in administration with the affairs of the railroad company, so as to make the two corporations virtually one, brings the railroad company so voluntarily acting as to such producing, etc., corporation within the prohibitions of the commodities clause. In other words, that by operation and effect of the commodities clause there is duty cast upon a railroad company proposing to carry in interstate commerce the product of a producing, etc., corporation in which it has a stock interest, not to abuse such power so as virtually to do by indirection that which the commodities clause prohibits, — a duty which plainly would be violated by the unnecessary commingling of the affairs of the producing company with its own, so as to cause them to be one and inseparable.

Corrobarative authorities can be cited in support of the same proposition, which we deem unnecessary to mention here.

From the facts hereinabove stated, as established by a preponderance of the evidence , particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed statement of facts, we find that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and purposes one and the same; or, to use another mode of expression, that, as regards those transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our mind, this is conclusively borne out by the fact, among others, that the amount of he so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car and Equipment Company. If, in their relations with each other, Koppel (Philippines), Inc., was considered and intended to function as a bona fide separate corporation, we can not conceive how this arrangement could have been adopted, for if there was any factor in its business as to which it would in that case naturally have been opposed to being thus controlled, it must have been precisely the amount of profit which it could endeavor and hope to earn. No group of businessmen could be expected to organize a mercantile corporation — the ultimate end of which could only be profit — if the amount of that profit were to be subjected to such a unilateral control of another corporation, unless indeed the former has previously been designed by the incorporators to serve as a mere subsidiary, branch or agency of the latter. Evidently, Koppel Industrial Car and Equipment Company made us of its ownership of the overwhelming majority — 99.5% — of the capital stock of the local corporation to control the operations of the latter to such an extent that it had the final say even as to how much should be allotted to said local entity in the so-called sharing in the profits. We can


not overlook the fact that in the practical working of corporate organizations of the class to which these two entities belong, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the Board of Directors but, more often than not, also the action of that Board. Applying this to the instant case, we can not conceive how the Philippine corporation could effectively go against the policies, decisions, and desires of the American corporation with regards to the scheme which was devised through the instrumentality of the contract Exhibit H, as well as all the other details of the system which was adopted in order to avoid paying the 1½ per cent merchants sales tax. Neither can we conceive how the Philippine corporation could avoid following the directions of the American corporation held 99.5 per cent of the capital stock of the Philippine corporation. In the present instance, we note that Koppel (Philippines), Inc., was represented in the Philippines by its "resident Vice-President." This fact necessarily leads to the inference that the corporation had at least a Vice-President, and presumably also a President, who were not resident in the Philippines but in America, where the parent corporation is domiciled. If Koppel (Philippines), Inc., had been intended to operate as a regular domestic corporation in the Philippines, where it was formed, the record and the evidence do not disclose any reason why all its officers should not reside and perform their functions in the Philippines.

Other facts appearing from the evidence, and presently to be stated, strengthen our conclusion, because they can only be explained if the local entity is considered as a mere subsidiary, branch or agency of the parent organization. Plaintiff charged the parent corporation no more than actual cost — without profit whatsoever — for merchandise allegedly of its own to complete deficiencies of shipments made by said parent corporation (t.s.n., pp.

53, 54) — a fact which could not conceivably have been the case if plaintiff had acted in such transactions as an entirely independent entity doing business — for profit, of course — with the American concern. There has been no attempt even to explain, if the latter situation really obtained, why these two corporations should have thus departed from the ordinary course of business. Plaintiff was charged by the American corporation with the cost even of the latter's cable quotations — from ought that appears from the evidence, this can only be comprehended by considering plaintiff as such a subsidiary, branch or agency of the parent entity, in which case it would be perfectly understandable that for convenient accounting purposes and the easy determination of the profits or losses of the parent corporation's Philippines should be charged against the Philippine office and set off against its receipts, thus separating the accounts of said branch from those which the central organization might have in other countries. The reference to plaintiff by local banks, under a standing instruction of the parent corporation, of unpaid drafts drawn on Philippine customers by said parent corporation, whenever said customers dishonored the drafts, and the fact that the American corporation had previously advised said banks that plaintiff in those cases was "fully empowered to instruct (the banks) with regard to the disposition of the drafts and documents" (t.s.n., p. 50), in the absence of any other satisfactory explanation naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the American concern, rather than an independent corporation acting as a broker. For, without such positive explanation, this delegation of power is indicative of the relations between central and branch offices of the same business enterprise, with the latter acting under instructions already given by the former. Far from disclosing a real separation between the two entities, particularly in regard to the transactions in question, the evidence reveals such commongling and interlacing of their activities as to render even incomprehensible certain accounting operations between

them, except upon the basis that the Philippine corporation was to all intents and purposes a mere subsidiary, branch, or agency of the American parent entity. Only upon this basis can it be comprehended why it seems not to matter at all how much profit would be allocated to plaintiff, or even that no profit at all be so allocated to it, at any given time or after any given period.

As already stated above, under the evidence the sales in the Philippines of the railway materials, machinery and supplies imported here by Koppel Industrial Car and Equipment Company could have been as conviniently and efficiently transacted and handled — if not more so — had said corporation merely established a branch or agency in the Philippines and obtained license to do business locally; and if it had done so and said sales had been effected by such branch or agency, there seems to be no dispute that the 1½ per cent merchants' sales tax then in force would have been collectible. So far as we can discover, there would be only one, but very important, difference between the two schemes — a difference in tax liability on the ground that the sales were made through another and distinct corporation, as alleged broker, when we have seen that this latter corporation isvirtually owned by the former, or that they practically one and the same, is to sanction a circumvention of our tax laws, and permit a tax evasion of no mean proportions and the consequent commission of a grave injustice to the Government. Not only this; it would allow the taxpayer to do by indirection what the tax laws prohibited to be done directly (non-payment of legitimate taxes), paraphrasing the United States Supreme Court in United States vs. Lehigh Valley R. Co., supra.

The act of one corporation crediting or debiting the other for certain items, expenses or even merchandise sold or disposed of, is perfectly compatible with the idea of the domestic entity being or acting as a mere branch, agency or subsidiary of the parent organization. Such operations


were called for any way by the exigencies or convenience of the entire business. Indeed, accounting operation such as these are invitable, and have to be effected in the ordinary course of business enterprise extends its trade to another land through a branch office, or through another scheme amounting to the same thing.

If plaintiff were to act as broker in the Philippines for any other corporation, entity or person, distinct from Koppel Industrial Car and Equipment company, an entirely different question will arise, which, however, we are not called upon, nor in a position, to decide.

As stated above, Exhibit H contains to the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a broker as set forth above, and shall not take possession of any of the materials or equipment applying to said orders or perform any acts or duties outside the scope of a broker; and in no sense shall this contract be construed as granting to the broker the power to represent the principal as its agent or to make commitments on its behalf.

The foregoing paragraph, construed in the light of other facts noted elsewhere in this decision, betrays, we think a deliberate intent, through the medium of a scheme devised with great care, to avoid the payment of precisely the 1½ per cent merchants' sales tax in force in the Philippines before, at the time of, and after, the making of the said contract Exhibit H. If this were to be allowed, the payment of a tax, which directly could not have been avoided, could be evaded by indirection, consideration being had of the aforementioned peculiar relations between the said American and local corporations. Such evasion, involving as it would, a violation of the former Internal Revenue Law, would even fall within the penal sanction of section 2741 of the Revised Administrative Code. Which only goes to show the illegality of the whole scheme. We are

not here concerned with the impossibility of collecting the merchants' sales tax, as a mere incidental consequence of transactions legal in themselves and innocent in their purpose. We are dealing with a scheme the primary, not to say the sole, object of which the evasion of the payment of such tax. It is this aim of the scheme that makes it illegal.

We have said above that the contracts of sale involved herein were all perfected in the Philippines. From the facts stipulated in paragraph IV of the agreed statement of facts, it clearly appears that the Philippine purchasers had to wait for Koppel Industrial Car and Equipment Company to communicate its cost prices to Koppel (Philippines), Inc., were perfected in the Philippines. In those cases where no such price quotations from the American corporation were needed, of course, the sales effected in those cases described in paragraph V of the agreed statement of facts were, as expressed therein, transacted "in substantially the same manner as outlined in paragraph VI." Even the single transaction described in paragraph VI of the agreed statement of facts was also perfected in the Philippines, because the contracting parties were here and the consent of each was given here. While it is true that when the contract was thus perfected in the Philippines the pair of Atlas-Diesel Marine Engines were in Sweden and the agreement was to deliver them C.I.F. Hongkong, the contract of sale being consensual — perfected by mere consent — (Civil Code, article 1445; 10 Manresa, 4th ed., p. 11), the location of the property and the place of delivery did not matter in the question of where the agreement was perfected.

In said paragraph VI, we read the following, as indicating where the contract was perfected, considering beforehand that one party, Koppel (Philippines),Inc., which in contemplation of law, as to that transaction, was the same Koppel Industrial Car Equipment Co., was in the Philippines:

. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)

Under the revenue law in force when the sales in question took place, the merchants' sales tax attached upon the happening of the respective sales of the "commodities, goods, wares, and merchandise" involved, and we are clearly of opinion that such "sales" took place upon the perfection of the corresponding contracts. If such perfection took place in the Philippines, the merchants' sales tax then in force here attached to the transactions.

Even if we should consider that the Philippine buyers in the cases covered by paragraph IV and V of the agreed statement of facts, contracted with Koppel Industrial Car and Equipment company, we will arrive at the same final result. It can not be denied in that case that said American corporation contracted through Koppel (Philippines), Inc., which was in the Philippines. The real transaction in each case of sale, in final effect, began with an offer of sale from the seller, said American corporation, through its agent, the local corporation, of the railway materials, machinery, and supplies at the prices quoted, and perfected or completed by the acceptance of that offer by the local buyers when the latter, accepting those prices, placed their orders. The offer could not correctly be said to have been made by the local buyers when they asked for price quotations, for they could not rationally be taken to have bound themselves to buy before knowing the prices. And even if we should take into consideration the fact that the american corporation contracted, at least partly, through correspondence, according to article 54 of the Code of Commerce, the respective contracts were completed from the time of the acceptance by the local buyers, which happened in the Philippines.

Contracts executed through correspondence shall be completed from the time an answer is madeaccepting the


proposition or the conditions by which the latter may be modified." (Code of Commerce, article 54; emphasis supplied.)

A contract is as a rule considered as entered into at the place where the place it is performed. So where delivery is regarded as made at the place of delivery." (13 C. J., 580-81, section 581.)

(In the consensual contract of sale delivery is not needed for its perfection.)

II. Appellant's second assignment of error can be summarily disposed of. It is clear that the ruling of the Secretary of Finance, Exhibit M, was not binding upon the trial court, much less upon this tribunal, since the duty and power of interpreting the laws is primarily a function of the judiciary. (Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by this legal principle, nor can it properly be heard to say that it relied on the Secretary's ruling and that, therefore, the courts should not now apply an interpretation at variance therewith. The rule of stare decisis is undoubtedly entitled to more respect in the construction of statutes than the interpretations given by officers of the administrative branches of the government, even those entrusted with the administration of particular laws. But this court, in Philippine Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:

. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in the business field, is desirable. But idolatrous reverence for precedent, simply as precedent, no longer rules. More important than anything else is that court should be right. . . .

III. In the view we take of the case, and after the disposition made above of the first assignment of error, it becomes unnecessary to make any specific ruling on the third, fourth, fifth, sixth, and seventh assignments of error,

all of which are necessarily disposed of adversely to appellant's contention.

Wherefore, he judgment appealed from is affirmed, with costs of both instances against appellant. So ordered.

G.R. No. L-13119 September 22, 1959

RICARDO TANTONGCO, petitioner, vs.KAISAHAN NG MGA MANGGAGAWA SA LA CAMPAN (KKM) AND THE HONORABLE COURT OF INDUSTRIAL RELATIONS, respondents.

MONTEMAYOR, J.:

This is a petition for certiorari and prohibition with prayer for issuance of a writ of preliminary injunction to prohibit respondent Court of Industrial Relations from proceeding with the hearing of the contempt proceedings for which petitioner Ricardo Tantongco was cited to appear the present his evidence. The contempt proceedings which petitioner seeks to stop are based on the order of the Court of Industrial Relations, dated September 30, 1957, which reads as follows:

It appearing that the Order of this Court, in the above-entitled case, dated February 18, 1957 (folios 134-166), has become final and executory and the respondents have failed to comply with the same, the said respondents, namely, the La Campana Starch and Coffee Factory or its manager or the person who has charge of the management, and the administrator of the Estate of Ramon Tantongco are hereby ordered to comply with said order, within five days from receipt hereof, particularly the following, to wit:

(a) To reinstate the persons named in the said Order of February 18, 1957;

(b) To deposit the amount of P65,534.01 with this Court.

With respect to possible back wages from August 28, 1957 as mentioned in the petition for contempt of August 30, 1957, the same shall first be determined.

Failure to comply with this Order shall be directly dealt with accordingly.

It would appear that petitioner Ricardo Tantongco failed to comply with said order and so, as already stated, he was cited to appear and to adduce evidence on his behalf to show why he should not be punished for indirect contempt.

The facts in this case may be briefly narrated thus: Sometime in June, 1951, members of the Kaisahan ng mga Manggagawa sa La Campana, a labor union to which were affiliated workers in the La Campana Starch Factory and La Campana Coffee Factory, two separate entities but under the one management, presented demands for higher wages, and more privileges and benefits in connection with their work. When the management failed and refused to grant the demands, the Department of Labor intervened; but failing to settle the controversy, it certified the dispute to the Court of Industrial Relations on July 17, 1951, where it was docketed as Case No. 584–V. On the theory that the laborers presenting the demands were only the ones working in the coffee factory, said company filed through the management a motion to dismiss claiming that inasmuch as there were only 14 of them in said factory, the Court of Industrial Relations had no jurisdiction to entertain and decide the case. The motion was denied by the Court of Industrial Relations, which said:

. . . There was only management for the business of gawgaw and coffee with whom the laborers are dealing regarding their work. Hence, the filing of action against the La Campana Starch and Coffee Factory is proper and justified.1âwphïl.nêt


The order of denial was appealed to this Tribunal through certiorari under G.R. No. L-5677. In disposing of the case, we held:

As to the first ground, petitioners obviously do not question the fact that the number of employees of the La Campana Gaugau Packing involved in the case is more than the jurisdictional number (31) required by law, but they contend that the industrial court has no jurisdiction to try case against La Campana Coffee Factory Co. Inc. because the latter has allegedly only 14 laborers and only five of these are members of respondent Kaisahan. This contention loses force when it is noted that, as found by the industrial court — and this finding is conclusive upon us — La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating under one single management, that is, one business though with two trade names. True, the coffee factory is a corporation , and, by legal fiction, an entity existing separate and part from the persons composing it, that is, Tan Tong and his family. But is settled this fiction of law, which has been introduced as a matter of convenience and to subserve the ends of justice cannot be invoke to further an end subversive of that purpose.

... The attempt to make the two factories appear as two separate business, when in reality, they are but one is but a device to defeat the ends of the law (the Act governing capital and labor relations) and should not be permitted to prevail. (La Campana Coffee Factory, et al., vs. Kaisahan ng mga Manggagawa, etc. et al., 93 Phil., 160; 49 Off. Gaz., [6] 2300.)

Upon the return of the case to the Court of Industrial Relations, the latter proceeded with the hearing. In the meantime incidental cases involving the same parties came up and were filed before the Court of Industrial Relations in the following cases:1âwphïl.nêt

Case No. 584-V(1) — petition for contempt against the La Campana Starch and Coffee Factory for having employed 21 new laborers in violation of the order of July 21, 1951, filed on July 25, 1951;

Case No. 584-V(2) — petition of La Campana for authority for authority to dismiss Loreto Bernabe, filed on July 25, 19651;

Case No. 584-V(3) — petition of Union to reinstate Bonifacio Calderon with backpay, filed on August 3, 1951;

Case No. 584-V(5) — petition of Union to reinstate Marcelo Estrada and Exequiel Rapiz with back pay and to punish officials of the company for contempt, filed on February 13, 1952; and

Case No. 584-V(6) — petition of union for reinstatement of Ibardolaza and seven other member-laborers and to punish the officers of the company for contempt, filed on July 15, 1953.

These five cases were heard jointly. In the meantime Ramon Tantongco supposed to be the owner and manager of the La Campana Starch Factory and the person in charge of the La Campana Coffee Factory died on May 16, 1956. On motion of the labor union, the Court of Industrial Relations order the inclusion as party respondent of the administrator of the estate of Ramon Tantongco who was Ricardo Tantongco.

Ricardo Tantongco, as administrator, under a special appearance filed a motion to dismiss all the cases including the main case, that is to say, Cases No. 584-(V) to 584-V(6), on the ground that said cases involved claims for sums of money and consequently should be filed before the probate court having jurisdiction over the estate, pursuant to the provisions of Rule 3, Section 21, and Rule 88, Section 1 of the Rules of Court. On August

23, 1956, the Court of Industrial Relations denied the motion to dismiss and proceed to hear the incidental cases against the La Campana entities.

On June 12, 1956, a partial decision was rendered in the main case No. 584-V, which partial decision was elevated to us and is still pending appeal. On February 18, 1957, the Court of Industrial Relations issued an order in incidental Cases No. 584-V(1), V(2), V(5) and V(6), directing the "management of the respondent company and or the administrator of the Estate of Ramon Tantongco", to reinstate the dismissed laborers mentioned therein with back wages. This order of February 18, 1957, as well as the order directing the inclusion of the administrator of the estate of Ramon Tantongco as additional respondent in the incidental cases, and the order denying the petition of the administrator to dismiss said incidental cases were appealed to this tribunal though certiorari. The appeal, however, was summarily dismissed by this Court in its resolution of June 12, 1957, as follows:

This Court, deliberating upon the allegations of the petition filed in case l-12355 (La Campana Starch Coffee Factory et al. vs. Kaisahan ng Mga Manggagawa sa la Campana, KKM, et al) for review, on certiorari of the decision of the Court of Industrial Relations referred to therein, and finding that there is no merit in the petition, RESOLVE TO DISMISS the same.

The CIR order of February 18, ,1957, in the incidental cases Nos. 584-V to V(6), having become final and executory , the laborers involved reported for work on August 28, 1957, but they were not admitted by the management. Consequently, the union filed a petition dated August 30, 1957, to hold respondents in said cases for contempt. After hearing the CIR issued the order of September 30, 1957, subject of this petition, ordering "the La Campana Starch and Coffee Factory or its manager or the person who has charge of its management and the administrator of the estate of Ramon Tantongco" to


"reinstate the persons named in the order of February 18, 1957" and "to deposit the amount of P65,534.01." For refusal or failure to comply with said order, petitioner Ricardo Tantongco was required to appear before the attorney of the CIR in contempt proceedings. Petitioner now seeks to prohibit the CIR from proceeding with the trial for contempt and to enjoin respondent CIR from enforcing its order of September 30, 1957.

Petitioner contends that upon the death of Ramon Tantongco, the claims of the laborers should have been dismissed and that said claims should have been filed with the probate court having jurisdiction over the administration proceedings of the estate of Ramon Tantongco, pursuant to the provisions of Rule 3, Section 21 of the Rules of Court and that the failure to file claims with the administrator forever barred said claims as provided in Rule 87, Section 5 of the Rules of Court, especially after the assets of the estate had been distributed among the heirs, and petitioner had ceased to be the administrator of the estate. As already stated this same question was raised by petitioner in G.R. No. L-12355, entitled "La Campana Starch and Coffee Factory and Ricardo Tantongco, etc. vs. Kaisahan ng mga Manggagawa sa La Campana (KKM)," which, as already stated, was summarily dismissed by this Court in a resolution dated June 12, 1957. Consequently, said question may not again be raised in the present case. Furthermore, it may be recalled that both in the main case in the incidental cases No. 584-V to 584-V(6), Ramon Tantongco was never a party. The party there was the La Campana Starch and Coffee Factory by which name it was sought to designate the two entities La Campana Starch Packing and the La Campana Coffee Factory. Naturally, the claims contained in said cases were not the claims contemplated by law to be submitted before the administrator. In other words the death of Ramon Tantongco did not deprive the CIR of its jurisdiction over the cases aforementioned. Moreover, the money claims of

the laborers were merely incidental to their demands for reinstatement for having been unjustly dismissed, and for better working conditions.

Petitioner, however, contends that in G.R. No. L-5677, we "pierced the veil of corporate existence", and held that the La Campana Starch and Coffee Factory and its owner, Ramon Tantongco, were one; so that with the death of Ramon, the La Campana entities ceased to exist, resulting in the loss of jurisdiction of the CIR to enforce its order against said entities. The reason we applied the so-called "piercing the veil of corporate existence" in G.R. No. L-5677 was to avoid the technicality therein advanced in order to defeat the jurisdiction of the CIR. We there found that although there were ostensibly two separate companies or entities, they were managed by the same person or persons and the workers in both were used interchangeably so that in order to determine whether or not the CIR had jurisdiction, the number of workers in both entitles, not in only one, was to be considered. However, we still believe that although the family of Ramon Tantongco was practically the owner of both the coffee factory and the starch factory, nevertheless these entities are separate from the personality of Ramon. The coffee factory is a stock corporation and the shares are owned not only by Ramon but also by others, such as petitioner Ricardo who not only is a stockholder and director and treasurer but also the management of the same Furthermore, petitioner is now estopped from claiming that the two entities in question and Ramon are one. Thus in Annex 3-CIR (par. 1 thereof) which is a complaint for injunction filed by La Campana Food Products, et al and La Campana Starch Packing against the consolidated Labor Organization of the Philippines, in civil Case No. P-25482 in the Court of First Instance of Rizal, petitioner admitted the existence and operation of said entities; in Annex 4—CIR where petitioner appeared as General Manager representing the two entities in its agreement with the La Campana Workers Union to

resolve the dispute between the two entities and the laborers in case Nos. 1072-V and 1371-ULP, the existence of the two entities appears to have been admitted; and in Annex 5-A-CIR, an answer to the complaint of La Campana Workers Union in case No. 1471-ULP (Annex 5-CIR), petitioner admitted the allegation that said two factories were in existence and doing business with petitioner as manager of the same.

In relation to the order of the CIR requiring petitioner to appear in the contempt proceedings instituted against him, petitioner contends that after he ceased to be the administrator of the estate of Ramon Tantongco, he may not now be compelled to comply with the order of the court. In answer, it is enough to bear in mind the jurisdiction and authority of the CIR as to compliance with and violations of its orders under section 6, Commonwealth Act No. 143, which we quote below:

. . . The Court or any Judge thereof shall have furthermore, all the inherent powers of a court of justice provided in paragraph 5 of Rule 124 of the Supreme Court, as well as the power to punish direct and indirect contempt as provided in Rule 64 of the same Court, under the same procedure and penalties provided therein.

Any violation of any order, award, or decision of the Court of Industrial Relations shall, after such order, award or decision has become final, conclusive, and executory, constitute contempt of court: . . .

In case the employer (or landlord) committing any such violation or contempt is an association or corporation, the manager or the person who has the charge of the management of the business of the association or corporation and the officers of directors thereof who have ordered or authorized the violation of contempt shall be liable. . . .


In conclusion, we find and hold that the La Campana Starch and Food Products Company which stands for the La Campana Starch and Coffee Factory are entities distinct from the personality of Ramon Tantongco; that after the death of Ramon these two entities continued to exist and to operate under the management of petitioner and that consequently he is the proper person and official to which the orders of the CIR are addressed and who is in duty bound to comply with the same. We further find that the CIR acted with in its jurisdiction in issuing its order of September 30, 1957 and in requiring petitioner to appear to give his evidence if any in relation with the contempt proceedings instituted against him.1âwphïl.nêt

In view of the foregoing, the petition for certiorari is .hereby denied and the writ of preliminary injunction dissolved, with costs.

G.R. No. L-2886 August 22, 1952

GREGORIO ARANETA, INC., plaintiff-appellant, vs.PAZ TUASON DE PATERNO and JOSE VIDAL, defendants-appellants.

TUASON, J.:

This is a three-cornered contest between the purchasers, the seller, and the mortgagee of certain portions (approximately 40,703 square meters) of a big block of residential land in the district of Santa Mesa, Manila. The plaintiff, which is the purchaser, and the mortgagee elevated this appeal. Though not an appellant, the seller and mortgagor has made assignments of error in her brief, some to strengthen the judgment and others for the purpose of new trial.

The case is extremely complicated and multiple issues were raised.

The salient facts in so far as they are not controverted are these. Paz Tuason de Paterno is the registered owner of the aforesaid land, which was subdivided into city lots. Most of these lots were occupied by lessees who had contracts of lease which were to expire on December 31,1952, and carried a stipulation to the effect that in the event the owner and lessor should decide to sell the property the lessees were to be given priority over other buyers if they should desire to buy their leaseholds, all things being equal. Smaller lots were occupied by tenants without formal contract.

In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans totalling P90,098 and constituted a first mortgage on the aforesaid property to secure the debt. In January and April, 1943, she obtained additional loans of P30,000 and P20,000 upon the same security. On each of the last-mentioned occasions the previous contract of mortgage was renewed and the amounts received were consolidated. In the first novated contract the time of payment was fixed at two years and in the second and last at four years. New conditions not relevant here were also incorporated into the new contracts.

There was, besides, a separate written agreement entitled "Penalidad del Documento de Novacion de Esta Fecha" which, unlike the principal contracts, was not registered. The tenor of this separate agreement, all copies, of which were alleged to have been destroyed or lost, was in dispute and became the subject of conflicting evidence. The lower court did not make categorical findings on this point, however, and it will be our task to do so at the appropriate place in this decision.

In 1943 Paz Tuason decided to sell the entire property for the net amount of P400,000 and entered into negotiations with Gregorio Araneta, Inc. for this purpose. The result of the negotiations was the execution on October 19, 1943, of a contract called "Promesa de Compra y Venta" and identified as Exhibit "1." This contract provided that

subject to the preferred right of the lessees and that of Jose Vidal as mortgagee, Paz Tuason would sell to Gregorio Araneta, Inc. and the latter would buy for the said amount of P400,000 the entire estate under these terms.

El precio sera pagado como sigue: un 40 por ciento juntamente con la carta de aceptacion del arrendatario, un 20 por ciento delprecio al otorgarse la escritura de compromiso de venta, y el remanente 40 por ciento al otorgarse la escritura de venta definitiva, la cual sera otorgada despues de que se habiese canceladola hipoteca a favor de Jose Vidal que pesa sobre dichos lotes. Lacomision del 5 por ciento que corresponde a Jose Araneta serapagada al otorgarse la escritura de compromiso de venta.

Paz Tuason se obliga a entregar mediante un propio las cartasque dirigira a este efecto a los arrendatarios, de conformidad con el formulario adjunto, que se marca como Apendice A.

Expirado el plazo arriba mencionado, Paz Tuason otorgara las escrituras correspondientes de venta a los arrendatarios que hayan decidido comprar sus respectivos lotes.

9. Los alquieres correspondientes a este año se prorratearan entre la vendedora y el comprador, correspondiendo al comprador los alquileres correspondientes a Noviembre y Diciembre de este año y asimismo sera por cuenta del comprador el amillaramiento correspondiente a dichos meses.

10. Paz Tuason, reconoce haver recibido en este acto de Gregorio Araneta, Inc., la suma de Ciento Noventa Mil Pesos (P190,000)como adelanto del precio de venta que Gregorio Araneta, Inc., tuviere que pagar a Paz Tuason.

La cantidad que Paz Tuason recibe en este acto sera aplicadapor ella a saldar su deuda con Jose Vidal, los


amillaramientos, sobre el utilizado por Paz Tuason para otros fines.

11. Una vez determinados los lotes que Paz Tuason podra vendera Gregorio Araneta, Inc., Paz Tuason otorgara una escritura deventa definitiva sobre dichos lotes a favor de Gregorio Araneta, Inc.

Gregorio Araneta, Inc., pagara el precio de venta como sigue: 90 por ciento del mismo al otorgarse la escritura de venta definitiva descontandose de la cantidad que entonces se tenga que pagar de adelanto de P190,000 que se entrega en virtud de esta escritura. El 10 por ciento remanente se pagara a Paz Tuazon, una vez se haya cancelado la hipoteca que pesa actualmente sobre el terreno.

No obstante la dispuesto en el parrafo 8, cualquier arrendatario que decida comprar el lote que occupa con contrato de arrendamiento podra optar por pedir el otorgamiento inmediato a su favor el acto de la escritura de venta definitiva pagando en el acto el 50 por ciento del precio (ademas del 40 por ciento que debio incluir en su carta de aceptacion) y el remanente de 10 por ciento inmediatemente despues de cancelarse la hipoteca que pesa sobre el terreno.

12. Si la mencionada cantidad de P190,000 excediere del 90 por ciento de la cantidad que Gregorio Araneta, Inc., tuviere que vender a dicho comprador, el saldo sera pagado inmediatamente por Paz Tuazon, tomandolo de las cantidades que reciba de los arrendatarios como precio de venta.

In furtherance of this promise to buy and sell, letters were sent the lessees giving them until August 31, 1943, an option to buy the lots they occupied at the price and terms stated in said letters. Most of the tenants who held contracts of lease took advantage of the opportunity thus extended and after making the stipulated payments were

giving their deeds of conveyance. These sales, as far as the record would show, have been respected by the seller.

With the elimination of the lots sold or be sold to the tenants there remained unencumbered, except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18 which have an aggregate area of 14,810.20 square meters; and on December 2, 1943, Paz Tuason and Gregorio Araneta, Inc. executed with regard to these lots an absolute deed of sale, the terms of which, except in two respects, were similar to those of the sale to the lessees. This deed, copy of which is attached to the plaintiff's complaint as Exhibit A, provided, among other things, as follows:

The aforesaid lots are being sold by he Vendor to the Vendee separately at the prices mentioned in paragraph (6) of the aforesaid contract entitled "Promesa de Compra y Venta," making a total sum of One Hundred Thirty-Nine Thousand Eighty-three pesos and Thirty-two centavos (P139,083.32), ninety (90%) per cent of which amount, i.e., the sum of One Hundred Twenty-five Thousand One Hundred Seventy-four Pesos and Ninety-nine centavos (P125,174.99), the Vendor acknowledges to have received by virtue of the advance of One Hundred Ninety Thousand (P190,000) Pesos made by the Vendee to the Vendor upon the execution of the aforesaid contract entitled "Promesa de Compra y Venta". The balance of Sixty-Four Thousand Eight Hundred Twenty-five Pesos and One centavo (P64,825.01) between the sum of P125,174.99, has been returned by the Vendor to the Vendee, which amount the Vendee acknowledges to have received by these presents;

The aforesaid sum of P190,000 was delivered by the Vendee to the Vendor by virtue of four checks issued by the Vendee against the Bank of the Philippine Islands, as follows:

No. C-286445 in favor of Paz Tuason de Paterno

No. C-286444 in favor of the City Treasurer, Manila

No. C-286443 in favor of Jose Vidal

No. C-286442 in favor of Jose Vidal

Total

The return of the sum of P64,825.01 was made by the Vendor to the Vendee in a liquidation which reads as follows:

Hemos recibido de Da. Paz Tuason de Paterno la cantidad de Sesenta y Cuatro mil Ochocientos Veinticinco Pesos y un centimo (P64,825.01) enconcepto de devolucion que nos hace del excesode lo pagadoa ella de

Menos el 90% de P139,083.32, importe de los lotes que vamos a comprar

Exceso

Cheque BIF No. D-442988 de Simplicio del Rosario

Cheque PNB No. 177863-K de L.E. Dumas

Cheque PNB No. 267682-K de Alfonso Sycip

Cheque PNB No. 83940 de Josefina de Pabalan

Billetes recibidos de Alfonso Sycip

Menos las comisiones de 5 % recibidas de Josefina de Pabalan


L.E. Dumas

Angela S. Tuason

Menos cheque BIF No. C-288642 a favor de Da. Paz Tuason de Paterno que le entregamos como exceso

Manila, Noviembre 2, 1943

GREGORIO ARANETA, INCORPORATEDPor; (Fdo.) "JOSE ARANETA Presidente

Recibido cheque No. C-288642 BIF-P493.23

Por: (Fdo.) "M.J. GONZALEZ

In view of the foregoing liquidation, the vendor acknowledges fully and unconditionally, having received the sum of P125,174.99 of the present legal currency and hereby expressly declares that she will not hold the Vendee responsible for any loss that she might suffer due to the fact that two of the checks paid to her by the Vendee were issued in favor of Jose Vidal and the latter has, up to the present time, not yet collected the same.

The ten (10%) per cent balance of the purchase price not yet paid in the total sum of P13,908.33 will be paid by the Vendee to the Vendor when the existing mortgage over the property sold by the Vendor to the Vendee is duly cancelled in the office of the Register of Deeds, or sooner at the option of the Vendee.

This Deed of Sale is executed by the Vendor free from all liens and encumbrances, with the only exception of the existing lease contracts on parcels Nos. 1, 10, 11, and 16, which lease contracts will expire on December 31, 1953, with the understanding, however, that this sale is being executed free from any option or right on the part of the lessees to purchase the lots respectively leased by them.

It is therefore clearly understood that the Vendor will pay the existing mortgage on her property in favor of Jose Vidal.

The liquidation of the amounts respectively due between the Vendor and the Vendee in connection with the rents and real estate taxes as stipulated in paragraph (9) of the contract entitled "Promesa de Compara y Venta" will be adjusted between the parties in a separate document.

Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to carry out their respective obligations under the option to purchase exercised by them so that the rights of the lessee to purchase the respective property leased by him is cancelled, the Vendor shall be bound to sell the same to the herein Vendee, Gregorio Araneta, Incorporated, in conformity with the terms and conditions provided in the aforesaid contract of "Promesa de Compra y Venta";

The documentary stamps to be affixed to this deed will be for the account of the Vendor while the expenses for the registration of this document will be for the account of the Vendee.

The remaining area of the property of the Vendor subject to Transfer Certificates of Title Nos. 60471 and 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9, and 17, all of the Consolidation of lots Nos. 20 and 117 of plan II-4755, G.L.R.O. Record No. 7680.

Before the execution of the above deed, that is, on October 20, 1943, the day immediately following the signing of the agreement to buy and sell, Paz Tuason had offered to Vidal the check for P143,150 mentioned in Exhibit A, in full settlement of her mortgage obligation, but the mortgagee had refused to receive that check or to cancel the mortgage, contending that by the separate agreement before mentioned payment of the mortgage was not to be effected totally or partially before the end of four years from April, 1943.

Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce Enrile, commenced an action against the mortgagee in October or the early paret of November 1943. the record of that case was destroyed and no copy of the complaint was presented in evidence. Attached to the complaint or deposited with the clerk of court by Attorney Ponce Enrile simultaneously with the docketing of the suit were the check for P143,150 previously turned down by Vidal, another certified check for P12,932.61, also drawn by Gregorio Araneta, Inc., in favor of Vidal, and one ordinary check for P30,000 issued by Paz Tuazon. These three checks were supposed to cover the whole indebtedness to Vidal including the principal and interest up to that time and the penalty provided in the separate agreement.

But the action against Vidal never came on for trial and the record and the checks were destroyed during the war operations in January or February, 1945; and neither was the case reconstituted afterward. This failure of the suit for the cancellation of Vidal's mortgage, coupled with the destruction of the checks tendered to the mortgagee, the nullification of the bank deposit on which those checks had been drawn, and the tremendous rise of real estate value following the termination of the war, gave occasion to the breaking off the schemes outlined in Exhibits 1 and A; Paz Tuason after liberation repudiated them for the reasons to be hereafter set forth. The instant action was


the offshoot, begun by Gregorio Araneta, Inc. to compel Paz Tuason to deliver to the plaintiff a clear title to the lots described in Exhibit A free from all liens and encumbrances, and a deed of cancellation of the mortgage to Vidal. Vidal came into the case in virtue of a summon issued by order of the court, and filed a cross-claim against Paz Tuazon to foreclose his mortgage.

It should be stated that the outset that all the parties are in agreement that Vidal's loans are still outstanding. Paz Tuason's counsel concede that the tender of payment to Vidal was legally defective and did not operate to discharge the mortgage, while the plaintiff is apparently uninterested in this feature of the case considering the matter one largely between the mortgagor and the mortgagee, although to a certain degree this notion is incorrect. At any rate, the points of discord between Paz Tuason and Vidal concern only the accrual of interest on the loans, Vidal's claim to attorney's fees, and the application of the debt moratorium law which the debtor now invokes. These matters will be taken up in the discussion of the controversy between Paz Tuason and Jose Vidal.

The principal bone of contention between Gregorio Araneta, Inc., and Paz Tuason was the validity of the deed of sale of Exhibit A on which the suit was predicated. The lower court's judgment was that this contract was invalid and was so declared, "sin per juicio de que la demandada Paz Tuason de Paterno pague a la entidad demandante todas las cantidades que habia estado recibiendo de lareferida entidad demandante, en concepto de pago de losterrenos, en moneda corriente, segun el cambio que debiaregir al tiempo de otorgarse la escritura segun la escalade "Ballentine", descontando, sin embargo, de dichas cantidades cualesquiera que la demandante haya estadorecibiendo como alquileres de los terrenos supuestamentevendidos a ella." The court based its opinion that Exhibit 1. His Honor, Judge Sotero Rodas,

agreedwith the defendant that under paragraph 8 of Exhibit 1 there was to be no absolute sale to Gregorio Araneta, Inc., unless Vidal's mortgage was cancelled.

In our opinion the trial court was in error in its interpretation of Exhibit 1. The contemplated execution of an absolute deed of sale was not contingent on the cancellation of Vidal's mortgage. What Exhibit 1 did provide (eleventh paragraph) was that such deed of absolute sale should be executed "una vez determinado los lotes que Paz Tuason podra vender a Gregorio Araneta, Inc." The lots which could be sold to Gregorio Araneta, Inc. were definitely known by October 31, 1943, which was the expiry of the tenants' option to buy, and the lots included in the absolute of which the occupants' option to buy lapsed unconditionally. Such deed as Exhibit A was then in a condition to be made.

Vidal's mortgage was not an obstacle to the sale. An amount had been set aside to take care of it, and the parties, it would appear, were confident that the suit against the mortgagee would succeed. The only doubt in their minds was in the amount to which Vidal was entitled. The failure of the court to try and decide that the case was not foreseen either.

This refutes, were think, the charge that there was undue rush on the part of the plaintiff to push across the sale. The fact that simultaneously with Exhibit A similar deeds were given the lessees who had elected to buy their leaseholds, which comprise an area about twice as big as the lots described in Exhibit A, and the further fact that the sale to the lessees have never been questioned and the proceeds thereof have been received by the defendant, should add to dispel any suspicion of bad faith on the part of the plaintiff. If anyone was in a hurry it could have been the defendant. The clear preponderance of the evidence that Paz Tuason was pressed for cash and that the payment of the mortgage was only an incident, or a necessary means to effectuate the sale. Otherwise she

could have settled her mortgage obligation merely by selling a portion of her estate, say, some of the lots leased to tenants who, except two who were in concentration camps, were only too anxious to buy and own the lots on which their houses were built.

Whatever the terms of Exhibit 1, the plaintiff and the defendant were at perfect liberty to make a new agreement different from or even contrary to the provisions of that document. The validity of the subsequent sale must of necessity depend on what it said and not on the provisions of the promise to buy and sell.

It is as possible proof or fraud that the discrepancies between the two documents bear some attention. It was alleged that Attorneys Salvador Araneta and J. Antonio Araneta who the defendant said had been her attorneys and had drawn Exhibit A, and not informed or had misinformed her about its contents; that being English, she had not read the deed of sale; that if she had not trusted the said attorneys she would not have been so foolish as to affix her signature to a contract so one-sided.

The evidence does not support the defendant. Except in two particulars, Exhibit A was a substantial compliance with Exhibit 1 in furtherance of which Exhibit A was made. One departure was the proviso that 10 per cent of the purchase price should be paid only after Vidal's mortgage should have been cancelled. This provisional deduction was not onerous or unusual. It was not onerous or unusual that the vendee should withhold a relatively small portion of the purchase price before all the impediments to the final consummation of the sale had been removed. The tenants who had bought their lots had been granted the privilege to deduct as much as 40 per cent of the stipulated price pending discharge of the mortgage, although his percentage was later reduced to 10 as in the case of Gregorio Araneta, Inc. It has also been that the validity of the sales to the tenants has not been contested; that these sales embraced in the aggregate


24,245.40 square meters for P260,916.68 as compared to 14,811.20 square meters sold to Gregorio Araneta, Inc. for P139,083.32; that the seller has already received from the tenant purchasers 90 per cent of the purchase money.

There is good reason to believe that had Gregorio Araneta, Inc. not insisted on charging to the defendant the loss of the checks deposited with the court, the sale in question would have gone the smooth way of the sales to the tenants. Thus Dindo Gonzales, defendant's son, declared:

P. Despues de haberse presentado esta demanda, recuerda usted haber tenido conversacion con Salvador Araneta acerca de este asunto?

R. Si Señor.

P. Usted fue quien se acerco al señor Salvador Araneta?

R. Si, señor.

P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo al señor Salvador Araneta?

R. No creo que es propio que yo diga, por tratarse de mi madre.

P. En otras palabras, usted quiere decir que no quiere usted que se vuelva decir o repetir ante este Honorable Juzgado lo que usted dijo al señor Salvador Araneta, pues, se trata de su madre?

R. No, señor.

P. Puede usted decirnos que quiso usted decir cuando que no quisiera decir?

R. Voy a decir lo que Salvador Araneta, yo me acerque a Don Salvador Araneta, y yo le dije que es una verguenza de que nosotros, en la familia tengamos que ir a la Corte por este, y tambien dije que mi madre de por si quiere vender el terreno a ellos, porque mi madre quiere pagar al

señor Vidal, y que es una verguenza, siendo entre parientes, tener que venir por este; era lo que yo dije al señor Salvador Araneta.

x x x x x x x x x

P. No recuerda usted tambien dijo al señor Salvador Araneta que usted no comulgaba con ella (su madre) en este asunto?

R. Si, Señor; porque yo creia que mi madre solamente queria anular esta venta, pero cuando me dijo el señor La O y sus abogados que, encima de quitar la propiedad, todavia tendria ella que pagar al señor Vidal, este no veso claro.

x x x x x x x x x

P. Ahora bien; de tal suerte que, tal como nosotros desperendemos de su testimonio, tanto, usted como, su madre, esteban muy conformes en la venta, es asi?

R. Si, señor.

The other stipulation embodied in Exhibit A which had no counterpart in Exhibit 1 was that by which Gregorio Araneta Inc. would hold Paz Tuason liable for the lost checks and which, as stated, appeared to be at the root of the whole trouble between the plaintiff and the defendant.

The stipulation reads:

In view of the foregoing liquidation, the Vendor acknowledges fully and unconditionally, having received the sum of P125,174.99 of the present legal currency and hereby expressly declares that she will not hold the Vendee responsible for any loss that she might suffer due to the fact that two of the checks paid to her by the Vendee were used in favor of Jose Vidal and the latter has, up to the present time, not yet collected the same.

It was argued that no person in his or her right senses would knowingly have agreed to a covenant so iniquitous and unreasonable.

In the light of all the circumstances, it is difficult to believe that the defendant was deceived into signing Exhibit A, in spite of the provision of which she and her son complaint. Intelligent and well educated who had been managing her affairs, she had an able attorney who was assisting her in the suit against Vidal, a case which was instituted precisely to carry into effect Exhibit A or Exhibit 1, and a son who is leading citizen and a business-man and knew the English language very well if she did not. Dindo Gonzalez took active part in, if he was not the initiator of the negotiations that led to the execution of Exhibit 1, of which he was an attesting witness besides. If the defendant signed Exhibit A without being apprised of its import, it can hardly be conceived that she did not have her attorney or her son read it to her afterward. The transaction involved the alienation of property then already worth a fortune and now assessed by the defendant at several times higher. Doubts in defendant's veracity are enhanced by the fact that she denied or at least pretended in her answer to be ignorant of the existence of Exhibit A, and that only after she was confronted with the signed copy of the document on the witness did she spring up the defense of fraud. It would look as if she gambled on the chance that no signed copy of the deed had been saved from the war. She could not have forgotten having signed so important a document even if she had not understood some of its provisions.

From the unreasonableness and inequity of the aforequoted Exhibit A it is not to be presumed that the defendant did not understand it. It was highly possible that she did not attach much importance to it, convinced that Vidal could be forced to accept the checks and not foreseeing the fate that lay in store for the case against the mortgagee.


Technical objections are made against the deed of sale.

First of these is that Jose Araneta, since deceased, was defendant's agent and at the same time the president of Gregorio Araneta, Inc.

The trial court found that Jose Araneta was not Paz Tuason's agent or broker. This finding is contrary to the clear weight of the evidence, although the point would be irrelevant, if the court were right in its holding that Exhibit A was void on another ground, i.e., it was inconsistent with Exhibit 1.

Without taking into account defendant's Exhibit 7 and 8, which the court rejected and which, in our opinion, should have been admitted, Exhibit 1 is decisive of the defendant's assertion. In paragraph 8 of Exhibit 1 Jose Araneta was referred to as defendant's agent or broker "who acts in this transaction" and who as such was to receive a commission of 5 per cent, although the commission was to be charged to the purchasers, while in paragraph 13 the defendant promised, in consideration of Jose Araneta's services rendered to her, to assign to him all her right, title and interest to and in certain lots not embraced in the sales to Gregorio Araneta, Inc. or the tenants.

However, the trial court hypothetically admitting the existence of the relation of principal and agent between Paz Tuason and Jose Araneta, pointed out that not Jose Araneta but Gregorio Araneta, Inc. was the purchaser, and cited the well-known distinction between the corporation and its stockholders. In other words, the court opined that the sale to Gregorio Araneta, Inc. was not a sale to Jose Araneta the agent or broker.

The defendant would have the court ignore this distinction and apply to this case the other well-known principle which is thus stated in 18 C.J.S. 380: "The courts, at law and in equity, will disregard the fiction of corporate entity

apart from the members of the corporation when it is attempted to be used as a means of accomplishing a fraud or an illegal act.".

It will at once be noted that this principle does not fit in with the facts of the case at bar. Gregorio Araneta, Inc. had long been organized and engaged in real estate business. The corporate entity was not used to circumvent the law or perpetrate deception. There is no denying that Gregorio Araneta, Inc. entered into the contract for itself and for its benefit as a corporation. The contract and the roles of the parties who participated therein were exactly as they purported to be and were fully revealed to the seller. There is no pretense, nor is there reason to suppose, that if Paz Tuason had known Jose Araneta to Gregorio Araneta, Inc's president, which she knew, she would not have gone ahead with the deal. From her point of view and from the point of view of public interest, it would have made no difference, except for the brokerage fee, whether Gregorio Araneta, Inc. or Jose Araneta was the purchaser. Under these circumstances the result of the suggested disregard of a technicality would be, not to stop the commission of deceit by the purchaser but to pave the way for the evasion of a legitimate and binding commitment buy the seller. The principle invoked by the defendant is resorted to by the courts as a measure or protection against deceit and not to open the door to deceit. "The courts," it has been said, "will not ignore the corporate entity in order to further the perpetration of a fraud." (18 C.J.S. 381.)

The corporate theory aside, and granting for the nonce that Jose Araneta and Gregorio Araneta, Inc. were identical and that the acts of one where the acts of the other, the relation between the defendant and Jose Araneta did not fall within the purview of article 1459 of the Spanish Civil Code.1

Agency is defined in article 1709 in broad term, and we have not come across any commentary or decision dealing

directly with the precise meaning of agency as employed in article 1459. But in the opinion of Manresa(10 Manresa 4th ed. 100), agent in the sense there used is one who accepts another's representation to perform in his name certain acts of more or less transcendency, while Scaevola (Vol. 23, p. 403) says that the agent's in capacity to buy his principal's property rests in the fact that the agent and the principal form one juridicial person. In this connection Scaevola observes that the fear that greed might get the better of the sentiments of loyalty and disinterestedness which should animate an administrator or agent, is the reason underlying various classes of incapacity enumerated in article 1459. And as American courts commenting on similar prohibition at common law put it, the law does not trust human nature to resist the temptations likely to arise of antogonism between the interest of the seller and the buyer.

So the ban of paragraph 2 of article 1459 connotes the idea of trust and confidence; and so where the relationship does not involve considerations of good faith and integrity the prohibition should not and does not apply. To come under the prohibition, the agent must be in a fiduciary with his principal.

Tested by this standard, Jose Araneta was not an agent within the meaning of article 1459. By Exhibits 7 and 8 he was to be nothing more than a go-between or middleman between the defendant and the purchaser, bringing them together to make the contract themselves. There was no confidence to be betrayed. Jose Araneta was not authorize to make a binding contract for the defendant. He was not to sell and he did not sell the defendant's property. He was to look for a buyer and the owner herself was to make, and did make, the sale. He was not to fix the price of the sale because the price had been already fixed in his commission. He was not to make the terms of payment because these, too, were clearly specified in his commission. In fine, Jose Araneta was left no power or


discretion whatsoever, which he could abuse to his advantage and to the owner's prejudice.

Defendant's other ground for repudiating Exhibit A is that the law firm of Araneta & Araneta who handled the preparation of that deed and represented by Gregorio Araneta, Inc. were her attorneys also. On this point the trial court's opinion is likewise against the defendant.

Since attorney Ponce Enrile was the defendant's lawyer in the suit against Vidal, it was not likely that she employed Atty. Salvador Araneta and J. Antonio Araneta as her attorneys in her dealings with Gregorio Araneta, Inc., knowing, as she did, their identity with the buyer. If she had needed legal counsels, in this transaction it seems certain that she would have availed herself of the services of Mr. Ponce Enrile who was allegedly representing her in another case to pave the way for the sale.

The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew Exhibits 1 and A, undertook to write the letters to the tenants and the deeds of sale to the latter, and charged the defendant the corresponding fees for all this work, did not themselves prove that they were the seller's attorneys. These letters and documents were wrapped up with the contemplated sale in which Gregorio Araneta, Inc. was interested, and could very well have been written by Attorneys Araneta and Araneta in furtherance of Gregorio Araneta's own interest. In collecting the fees from the defendant they did what any other buyer could have appropriately done since all such expenses normally were to be defrayed by the seller.

Granting that Attorney Araneta and Araneta were attorneys for the defendant, yet they were not forbidden to buy the property in question. Attorneys are only prohibited from buying their client's property which is the subject of litigation. (Art. 1459, No. 5, Spanish Civil Code.) The questioned sale was effected before the subject thereof became involved in the present action.

There was already at the time of the sale a litigation over this property between the defendant and Vidal, but Attys. Salvador Araneta and J. Antonio Araneta were not her attorneys in that case.

From the pronouncement that Exhibit A is valid, however, it does not follow that the defendant should be held liable for the loss of the certified checks attached to the complaint against Vidal or deposited with the court, or of the funds against which they had been issued. The matter of who should bear this loss does not depend upon the validity of the sale but on the extent and scope of the clause hereinbefore quoted as applied to the facts of the present case.

The law and the evidence on this branch of the case revealed these facts, of some of which passing mention has already been made.

The aforesaid checks, one for P143,150 and one for P12,932.61, were issued by Gregorio Araneta, Inc. and payable to Vidal, and were drawn against the Bank of the Philippines with which Gregorio Araneta, Inc. had a deposit in the certification stated that they were to be "void if not presented for payment date of acceptance" office (Bank) within 90 days from date of acceptance."

Under banking laws and practice, by the clarification" the funds represented by the check were transferred from the credit of the maker to that of the payee or holder, and, for all intents and purposes, the latter became the depositor of the drawee bank, with rights and duties of one such relation." But the transfer of the corresponding funds from the credit of the depositor to that of that of the payee had to be co-extensive with the life of the checks, which in the case was 90 days. If the checks were not presented for payment within that period they became invalid and the funds were automatically restored to the credit of the drawer though not as a current deposit but as special deposit. This is the consensus of the evidence for both

parties which does not materially differ on this proposition.

The checks were never collected and the account against which they were drawn was not used or claimed by Gregorio Araneta, Inc.; and since that account "was opened during the Japanese occupation and in Japanese currency," the checks "became obsolete as the account subject thereto is considered null and void in accordance with Executive Order No. 49 of the President of the Philippines", according to the Bank.

Whether the Bank of the Philippines could lawfully limit the negotiability of certified checks to a period less than the period provided by the Statute of Limitations does not seem material. The limitation imposed by the Bank as to time would adversely affect the payee, Jose Vidal, who is not trying to recover on the instruments but on the contrary rejected them from the outset, insisting that the payment was premature. As far as Vidal was concerned, it was of no importance whether the certification was or was not restricted. On the other hand, neither the plaintiff nor the defendant now insists that Vidal should present, or should have presented, the checks for collection. They in fact agree that the offer of those checks to Vidal did not, for technical reason, work to wipe out the mortgage.

But as to Gregorio Araneta and Paz Tuason, the conditions specified in the certification and the prevailing regulations of the Bank were the law of the case. Not only this, but they were aware of and abided by those regulations and practice, as instanced by the fact that the parties presented testimony to prove those regulations and practice. And that Gregorio Araneta, Inc. knew that Vidal had not cashed the checks within 90 days is not, and could not successfully be denied.

In these circumstances, the stipulation in Exhibit A that the defendant or seller "shall not hold the vendee responsible for any loss of these checks" was


unconscionable, void and unenforceable in so far as the said stipulation would stretch the defendant's liability for this checks beyond 90 days. It was not in accord with law, equity or good conscience to hold a party responsible for something he or she had no access to and could not make use of but which was under the absolute control and disposition of the other party. To make Paz Tuason responsible for those checks after they expired and when they were absolutely useless would be like holding an obligor to answer for the loss or destruction of something which the obligee kept in its safe with no power given the obligor to protect it or interfere with the obligee's possession.

To the extent that the contract Exhibit A would hold the vendor responsible for those checks after they had lapsed, the said contract was without consideration. The checks having become obsolete, the benefit in exchange for which the defendant had consented to be responsible for them had vanished. The sole motivation on her part for the stipulation was the fact that by the checks the mortgage might or was to be released. After 90 days the defendant stood to gain absolutely nothing by them, which had become veritable scraps of paper, while the ownership of the deposit had reverted to the plaintiff which alone could withdraw and make use of it.

What the plaintiff could and should have done if the disputed stipulation was to be kept alive was to keep the funds accessible for the purpose of paying the mortgage, by writing new checks either to Vidal or to the defendant, as was done with the check for P30,000, or placing the deposit at the defendant's disposal. The check for P30,000 intended for the penalty previously had been issued in the name of Vidal and certified, too, but by mutual agreement it was changed to an ordinary check payable to Paz Tuason. Although that check was also deposited with the court and lost, its loss undoubtedly was imputable to the

defendant's account, and she did not seem to disown her liability for it.

Let it be remembered that the idea of certifying the lost checks was all the plaintiff's. The plaintiff would not trust the defendant and studiously so arranged matters that she could not by any possibility put a finger on the money. For all the practical intents and purposes the plaintiff dealt directly with the mortgagee and excluded the defendant from meddling in the manner of payment to Vidal. And let it also be kept in mind that Gregorio Araneta, Inc. was not a mere accommodator in writing these checks. It was as much interested in the cancellation of the mortgage as Paz Tuason.

Coming down to Vidal's cross-claim Judge Rodas rendered no judgment other than declaring that the mortgage remained intact and subsisting. The amount to be paid Vidal was not named and the question whether interest and attorney's fees were due was not passed upon. The motion for reconsideration of the decision by Vidal's attorney's praying that Paz Tuason be sentenced to pay the creditor P244,917.90 plus interest at the rate of 1 percent monthly from September 10, 1948 and that the mortgaged property be ordered sold in case of default within 90 days, and another motion by the defendant seeking specification of the amount she had to pay the mortgagee were summarily denied by Judge Potenciano Pecson, to whom the motions were submitted, Judge Rodas by that time having been appointed to the Court of Appeals.

All the facts and evidence on this subject are on the record, however, and we may just as well determine from these facts and evidence the amount to which the mortgagee is entitled, instead of remanding the case for new trial, if only to avoid further delay if the disposition of this case.

It is obvious that Vidal had a right to judgment for his credit and to foreclose the mortgage if the credit was not paid.

There is no dispute as to the amount of the principal and there is agreement that the loans made in 1943, in Japanese war notes, should be computed under the Ballantyne conversion table. As has been said, where the parties do not see eye-to-eye was in regard to the mortgagee's claim to attorney's fees and interest from October, 1943, which was reached a considerable amount. It was contended that, having offered to pay Vidal her debt in that month, the defendant was relieved thereafter from paying such interest.

It is to be recalled that Paz Tuason deposited with the court three checks which were intended to cover the principal and interest up to October, 1943, plus the penalty provided in the instrument "Penalidad del Documento de Novacion de Esta Fecha." The mortgagor maintains that although these checks may not have constituted a valid payment for the purpose of discharging the debt, yet they did for the purpose of stopping the running of interest. The defendant draws attention to the following citations:

An offer in writing to pay a particular sum of money or to deliver a written instrument or specific personal property is, if rejected, equivalent to the actual production and tender of the money, instrument or property. (Sec. 24, Rule 123.)

It is not accord with either the letter or the spirit of the law to impose upon the person affecting a redemption of property, in addition to 12 per cent interest per annum up to the time of the offer to redeem, a further payment of 6 per cent per annum from the date of the officer to redeem. (Fabros vs. Villa Agustin, 18 Phil., 336.)


A tender by the debtor of the amount of this debt, if made in the proper manner, will suspend the running of interest on the debt for the time of such tender. (30 Am. Jur., 42.)

In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been sold on execution to one Tabliga. Within the period of redemption Fabros, to whom the land had been mortgaged by the execution debtor, had offered to redeem the land from the execution creditor and purchaser at public auction. The trial court ruled that the redemptioner was not obliged to pay the stipulated interest of 12 per cent after he offered to redeem the property; nevertheless he was sentenced to pay 6 per cent interest from the date of the offer.

This court on appeal held that "there is no reason for this other (6 per cent) interest, which appears to be a penalty for delinquency while there was no delinquency." The court cited an earlier decision, Martinez vs. Campbell, 10 Phil., 626, where this doctrine was laid down: "When the right of redemption is exercised within the term fixed by section 465 of the Code of Civil Procedure, and an offer is made of the amount due for the repurchase of the property to which said right refers, it is neither reasonable nor just that the repurchaser should pay interest on the redemption money after the time when he offered to repurchase and tendered the money therefor."

In the light of these decisions and law, the next query is; Did the mortgagor have the right under the contract to pay the mortgage on October 20, 1943? The answer to this question requires an inquiry into the provision of the "Penalidad del Documento de Novacion de Esta Fecha."

Vidal introduced oral evidence to the effect that he reserved unto himself in that agreement the right "to accept or refuse the total payment of the loan outstanding . . ., if at the time of such offer of payment he considered it advantageous to his interest." This was gist of Vidal's testimony and that of Lucio M. Tiangco, one of Vidal's

former attorneys who, as notary public, had authenticated the document. Vidal's above testimony was ordered stricken out as hearsay, for Vidal was blind and, according to him, only had his other lawyer read the document to him.

We are of the opinion that the court erred in excluding Vidal's statement. There is no reason to suspect that Vidal's attorney did not correctly read the paper to him. The reading was a contemporaneous incident of the writing and the circumstances under which the document was read precluded every possibility of design, premeditation, or fabrication.

Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was based on recollection which, with the lapse of time, was for from infallible. By contrast, the testimony of Attorneys Ponce Enrile, Salvador Araneta, and J. Antonio Araneta does not suffer from such weakness and is entitled to full faith and credit. The document was the subject of a close and concerted study on their part with the object of finding the rights and obligations of the mortgagee and the mortgagor in the premises and mapping out the course to be pursued. And the results of their study and deliberation were translated into concrete action and embodied in a letter which has been preserved. In line with the results of their study, action was instituted in court to compel acceptance by Vidal of the checks consigned with the complaint, and before the suit was commenced, and with the document before him, Atty. Ponce Enrile, in behalf of his client, wrote Vidal demanding that he accept the payment and execute a deed of cancellation of the mortgage. In his letter Atty. Ponce Enrile reminded Vidal that the recital in the "Penalidad del Documento de Novacion de Esta Fecha" was "to the effect that should the debtor wish to pay the debt before the expiration of the period the reinstated (two years) such debtor would have to pay, in addition to interest due, the penalty of P30,000 — this is

in addition to the penalty clause of 10 per cent of the total amount due inserted in the document of mortgage of January 20, 1943."

Atty. Ponce Enrile's concept of the agreement, formed after mature and careful reading of it, jibes with the only possible reason for the insertion of the penalty provision. There was no reason for the penalty unless it was for defendant's paying her debt before the end of the agreed period. It was to Vidal's interest that the mortgage be not settled in the near future, first, because his money was earning good interest and was guaranteed by a solid security, and second, which was more important, he, in all probability, shared the common belief that Japanese war notes were headed for a crash and that four years thence, judging by the trends of the war, the hostilities would be over.

To say, as Vidal says, that the debtor could not pay the mortgage within four years and, at the same time, that there would be penalty if she paid after that period, would be a contradiction. Moreover, adequate remedy was provided for failure to pay or after the expiration of the mortgage: increased rate or interest, foreclosure of the mortgage, and attorney's fees.

It is therefore to be concluded that the defendant's offer to pay Vidal in October, 1943, was in accordance with the parties' contract and terminated the debtor's obligation to pay interest. The technical defects of the consignation had to do with the discharge of the mortgage, which is conceded on all sides to be still in force because of the defects. But the matter of the suspension of the running of interest on the loan stands of a different footing and is governed by different principles. These principles regard reality rather than technicality, substance rather than form. Good faith of the offer or and ability to make good the offer should in simple justice excuse the debtor from paying interest after the offer was rejected. A debtor can not be considered delinquent who offered checks backed


by sufficient deposit or ready to pay cash if the creditor chose that means of payment. Technical defects of the offer cannot be adduced to destroy its effects when the objection to accept the payment was based on entirely different grounds. If the creditor had told the debtor that he wanted cash or an ordinary check, which Vidal now seems to think Paz Tuason should have tendered, certainly Vidal's wishes would have been fulfilled, gladly.

The plain truth was that the mortgagee bent all his efforts to put off the payment, and thanks to the defects which he now, with obvious inconsistency, points out, the mortgage has not perished with the checks.

Falling within the reasons for the stoppage of interest are attorney's fees. In fact there is less merit in the claim for attorney's fees than in the claim for interest; for the creditor it was who by his refusal brought upon himself this litigation, refusal which, as just shown, resulted greatly to his benefit.

Vidal, however, is entitled to the penalty, a point which the debtor seems to a grant. The suspension of the running of the interest is premised on the thesis that the debt was considered paid as of the date the offer to pay the principal was made. It is precisely the mortgagor's contention that he was to pay said penalty if and when she paid the mortgage before the expiration of the four-year period provided in the mortgage contract. This penalty was designed to take the place of the interest which the creditor would be entitled to collect if the duration of the mortgage had not been cut short and from which interest the debtor has been relieved. "In obligations with a penalty clause the penalty shall substitute indemnity for damages and the payment of interest. . ." (Art. 1152, Civil Code of Spain.).

To summarize, the following are our findings and decision:

The contract of sale Exhibit A was valid and enforceable, but the loss of the checks for P143,150 and P12,932.61 and invalidation of the corresponding deposit is to be borne by the buyer. Gregorio Araneta, Inc. the value of these checks as well as the several payments made by Paz Tuason to Gregorio Araneta, Inc. shall be deducted from the sum of P190,000 which the buyer advanced to the seller on the execution of Exhibit 1.

The buyer shall be entitled to the rents on the land which was the subject of the sale, rents which may have been collected by Paz Tuason after the date of the sale.

Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated interest up to October 20,1943, plus the penalty of P30,000, provided that the loans obtained during the Japanese occupation shall be reduced according to the Ballantyne scale of payment, and provided that the date basis of the computation as to the penalty is the date of the filing of the suit against Vidal.

Paz Tuason shall pay the amount that shall have been found due under the contracts of mortgage within 90 days from the time the court's judgment upon the liquidation shall have become final, otherwise the property mortgaged shall be ordered sold provided by law.

Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is hereby declared subject to said mortgage. Should Gregorio Araneta, Inc. be forced to pay the mortgage, it will be subrogated to the right of the mortgagee.

This case will be remanded to the court of origin with instruction to hold a rehearing for the purpose of liquidation as herein provided. The court also shall hear and decide all other controversies relative to the liquidation which may have been overlooked at this decision, in a manner not inconsistent with the above findings and judgment.

The mortgagor is not entitled to suspension of payment under the debt moratorium law or orders. Among other reasons: the bulk of the debt was a pre-war obligation and the moratorium as to such obligations has been abrogated unless the debtor has suffered war damages and has filed claim for them; there is no allegation or proof that she has. In the second place, the debtor herself caused her creditor to be brought into the case which resulted in the filing of the cross-claim to foreclose the mortgage. In the third place, prompt settlement of the mortgage is necessary to the settlement of the dispute and liquidation between Gregorio Araneta, Inc. and Paz Tuason. If for no other reason, Paz Tuason would do well to forego the benefits of the moratorium law.

There shall be no special judgments as to costs of either instance.

G.R. No. L-15121 August 31, 1962

GREGORIO PALACIO, in his own behalf and in behalf of his minor child, MARIO PALACIO, plaintiffs-appellants, vs.FELY TRANSPORTATION COMPANY, defendant-appellee.

REGALA, J.:

This is an appeal by the plaintiffs from the decision of the Court of First Instance of Manila which dismissed their complaint.

Originally taken to the Court of Appeals, this appeal was certified to this Court on the ground that it raises purely questions of law.

The parties in this case adopt the following findings of fact of the lower court:


In their complaint filed with this Court on May 15, 1954, plaintiffs allege, among other things, "that about December, 1952, the defendant company hired Alfredo Carillo as driver of AC-787 (687) (a registration for 1952) owned and operated by the said defendant company; that on December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo) Carillo was driving AC-687 at Halcon Street, Quezon City, wilfully, unlawfully and feloniously and in a negligent, reckless and imprudent manner, run over a child Mario Palacio of the herein plaintiff Gregorio Palacio; that on account of the aforesaid injuries, Mario Palacio suffered a simple fracture of the right tenor (sic), complete third, thereby hospitalizing him at the Philippine Orthopedic Hospital from December 24, 1952, up to January 8, 1953, and continued to be treated for a period of five months thereafter; that the plaintiff Gregorio Palacio herein is a welder by occupation and owner of a small welding shop and because of the injuries of his child he has abandoned his shop where he derives income of P10.00 a day for the support of his big family; that during the period that the plaintiff's (Gregorio Palacio's) child was in the hospital and who said child was under treatment for five months in order to meet the needs of his big family, he was forced to sell one air compressor (heavy duty) and one heavy duty electric drill, for a sacrifice sale of P150.00 which could easily sell at P350.00; that as a consequence of the negligent and reckless act of the driver Alfredo Carillo of the herein defendant company, the herein plaintiffs were forced to litigate this case in Court for an agreed amount of P300.00 for attorney's fee; that the herein plaintiffs have now incurred the amount of P500.00 actual expenses for transportation, representation and similar expenses for gathering evidence and witnesses; and that because of the nature of the injuries of plaintiff Mario Palacio and the fear that the child might become a useless invalid, the herein plaintiff Gregorio Palacio has suffered moral damages which could be conservatively estimated at P1,200.00.

On May 23, 1956, defendant Fely Transportation Co., filed a Motion to Dismiss on the grounds (1) that there is no cause of action against the defendant company, and (2) that the cause of action is barred by prior judgment..

In its Order, dated June 8, 1956, this Court deferred the determination of the grounds alleged in the Motion to Dismiss until the trial of this case.

On June 20, 1956, defendant filed its answer. By way of affirmative defenses, it alleges (1) that complaint states no cause of action against defendant, and (2) that the sale and transfer of the jeep AC-687 by Isabelo Calingasan to the Fely Transportation was made on December 24, 1955, long after the driver Alfredo Carillo of said jeep had been convicted and had served his sentence in Criminal Case No. Q-1084 of the Court of First Instance of Quezon City, in which both the civil and criminal cases were simultaneously tried by agreement of the parties in said case. In the Counterclaim of the Answer, defendant alleges that in view of the filing of this complaint which is a clearly unfounded civil action merely to harass the defendant, it was compelled to engage the services of a lawyer for an agreed amount of P500.00.

During the trial, plaintiffs presented the transcript of the stenographic notes of the trial of the case of "People of the Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084," in the Court of First Instance of Rizal, Quezon City (Branch IV), as Exhibit "A".1äwphï1.ñët

It appears from Exhibit "A" that Gregorio Palacio, one of the herein plaintiffs, testified that Mario Palacio, the other plaintiff, is his son; that as a result of the reckless driving of accused Alfredo Carillo, his child Mario was injured and hospitalized from December 24, 1952, to January 8, 1953; that during all the time that his child was in the hospital, he watched him during the night and his wife during the day; that during that period of time he could not work as he slept during the day; that before his child

was injured, he used to earn P10.00 a day on ordinary days and on Sundays from P20 to P50 a Sunday; that to meet his expenses he had to sell his compressor and electric drill for P150 only; and that they could have been sold for P300 at the lowest price.

During the trial of the criminal case against the driver of the jeep in the Court of First Instance of Quezon City (Criminal Case No. Q-1084) an attempt was unsuccessfully made by the prosecution to prove moral damages allegedly suffered by herein plaintiff Gregorio Palacio. Likewise an attempt was made in vain by the private prosecutor in that case to prove the agreed attorney's fees between him and plaintiff Gregorio Palacio and the expenses allegedly incurred by the herein plaintiffs in connection with that case. During the trial of this case, plaintiff Gregorio Palacio testified substantially to the same facts.

The Court of First Instance of Quezon City in its decision in Criminal Case No. 1084 (Exhibit "2") determined and thoroughly discussed the civil liability of the accused in that case. The dispositive part thereof reads as follows:

IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo Carillo y Damaso guilty beyond reasonable doubt of the crime charged in the information and he is hereby sentenced to suffer imprisonment for a period of Two Months & One Day of Arresto Mayor; to indemnify the offended party, by way of consequential damages, in the sum of P500.00 which the Court deems reasonable; with subsidiary imprisonment in case of insolvency but not to exceed ¹/3 of the principal penalty imposed; and to pay the costs.

On the basis of these facts, the lower court held action is barred by the judgment in the criminal case and, that under Article 103 of the Revised Penal Code, the person subsidiarily liable to pay damages is Isabel Calingasan, the employer, and not the defendant corporation.


Against that decision the plaintiffs appealed, contending that:

THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE DEFENDANT-APPELLEE IS SUBSIDIARILY LIABLE FOR DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF THE COURT OF FIRST INSTANCE OF QUEZON CITY FOR THE REASON THAT THE INCORPORATORS OF THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, ARE ISABELO CALINGASAN HIMSELF, HIS SON AND DAUGHTERS;

THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE INTENTION OF ISABELO CALINGASAN IN INCORPORATING THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, WAS TO EVADE HIS CIVIL LIABILITY AS A RESULT OF THE CONVICTION OF HIS DRIVER OF VEHICLE AC-687 THEN OWNED BY HIM:

THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF ACTION OF THE PLAINTIFFS-APPELLANTS IS BARRED BY PRIOR JUDGMENT.

With respect to the first and second assignments of errors, plaintiffs contend that the defendant corporate should be made subsidiarily liable for damages in the criminal case because the sale to it of the jeep in question, after the conviction of Alfred Carillo in Criminal Case No. Q-1084 of the Court of First Instance of Quezon City was merely an attempt on the part of Isabelo Calingasan its president and general manager, to evade his subsidiary civil liability.

The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same person. It is evident

that Isabelo Calingasan's main purpose in forming the corporation was to evade his subsidiary civil liability1 resulting from the conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. We believe that this is one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. (La Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May 25, 1953) Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep (AC-687) strengthens the conviction that its formation was for the purpose above indicated.

And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of Alonso v. Villamor, 16 Phil. 315, this Court can substitute him in place of the defendant corporation as to the real party in interest. This is so in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.)

Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily liable for P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he could not pay on account of insolvency.

We also sustain plaintiffs' third assignment of error and hold that the present action is not barred by the judgment of the Court of First Instance of Quezon City in the criminal case. While there seems to be some confusion on part of the plaintiffs as to the theory on which the is based — whether ex-delito or quasi ex-delito (culpa aquiliana) — We are convinced, from the discussion prayer in the

brief on appeal, that they are insisting the subsidiary civil liability of the defendant. As a matter of fact, the record shows that plaintiffs merely presented the transcript of the stenographic notes (Exhibit "A") taken at the hearing of the criminal case, which Gregorio Palacio corroborated, in support of their claim for damages. This rules out the defense of res judicata, because such liability proceeds precisely from the judgment in the criminal action, where the accused was found guilty and ordered to pay an indemnity in the sum P500.00.

WHEREFORE, the decision of the lower court is hereby reversed and defendants Fely Transportation and Isabelo Calingasan are ordered to pay, jointly and severally, the plaintiffs the amount of P500.00 and the costs.

G.R. No. L-56076 September 21, 1983

PALAY, INC. and ALBERT ONSTOTT, petitioner, vs.JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT respondents.

MELENCIO-HERRERA, J.:

The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are being assailed in this petition.

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private


respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all installments paid.

Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same request. Replying petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion

for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23, 1979. 1

On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised:

I

Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with by stipulation in a contract to sell.

II

Whether petitioners may be held liable for the refund of the installment payments made by respondent Nazario M. Dumpit.

III

Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar.

IV

Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly petitioner Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had been

issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6 thereof which provides-

6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed upon, the BUYER shall be granted a month of grace within which to make the payment of the t in arrears together with the one corresponding to the said month of grace. -It shall be understood, however, that should the month of grace herein granted to the BUYER expire, without the payment & corresponding to both months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in accordance with the agreement, together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises and for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his right to demand or reclaim


the return of the same and further obligates peacefully to vacate the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We quote the pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in account of infractions by the other contracting party must be made known to the other and is always provisional being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until

the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action win be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder (Emphasis supplied).

Of similar import is the ruling in Nera vs. Vacante 4, reading:

A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and determination.

This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is still necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7

In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of the contract by petitioners was warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided:

Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of


the contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied).

The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments.

Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither sham rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at

the legal rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single

stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality. 18 In this respect then, a modification of the Resolution under review is called for.

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.

No costs.

SO ORDERED.

G.R. No. 89879 April 20, 1990

JAIME PABALAN AND EDUARDO LAGDAMEO, petitioners, vs.NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER AMBROSIO B. SISON, ELIZABETH RODEROS, ET AL., and THE SHERIFF OF THE NATIONAL LABOR RELATIONS COMMISSION, respondents.

GANCAYCO, J.:

Once again the parameters of the liability of the officers of a corporation as to unpaid wages and other claims of the employees of a corporation which has a separate and distinct personality are brought to fore in this case.

On October 20, 1987, eighty-four (84) workers of the Philippine Inter-Fashion, Inc. (PIF) filed a complaint against the latter for illegal transfer simultaneous with illegal dismissal without justifiable cause and in violation of the provision of the Labor Code on security of tenure as


well as the provisions of Batas Pambansa Blg. 130. Complainants demanded reinstatement with full backwages, living allowance, 13th month pay and other benefits under existing laws and/or separation pay.

On October 21, 1987, PIF, through its General Manager, was notified about the complaint and summons for the hearing set for November 6, 1987. The hearing was re-set for November 27, 1987 for failure of respondents to appear. On November 30, 1987 respondents (petitioners herein) moved for the cancellation of the hearing scheduled on November 6, 1987 so that they could engage a counsel to properly represent them preferably on November 17, 1987.

On December 10, 1987 both parties were directed to submit their respective position papers within ten (10) days. By mutual agreement the hearing was re-set on December 21, 1987 but on said date respondents and/or counsel failed to appear. The hearing was re-set on January 14, 1988 on which date respondents were given a deadline to submit their position paper.

On January 4, 1988 complainants filed their position paper. On January 14, 1988 counsel for respondents moved that he be given until January 22, 1988 to file their position paper. The labor arbiter granted the motion. The PIF filed its position paper on January 22, 1988. The heating for February 17, 1988 was re-set to March 9, 1988 and on March 29, 1988 on which dates respondents failed to appear.

On May 5, 1988, with leave of the labor arbiter, complainants filed their supplemental position paper impleading the petitioners as officers of the PIF in the complaint for their illegal transfer to a new firm.

On July 13, 1988 a decision was rendered by the labor arbiter the dispositive part of which reads as follows:

IN VIEW OF THE FOREGOING CONSIDERATION, respondent Philippine Inter-Fashion and its officers Mr. Jaime Pabalan and Mr. Eduardo Lagdameo are hereby ordered to:

1. reinstate the sixty two (62) complainants to their former or equivalent position without loss of seniority rights and privileges;

2. to pay, jointly and severally, their backwages and other benefits from the time they were dismissed up to the time they are actually reinstated, the computation to be based from the latest minimum wage law at the time of their dismissal. (See attached Annex "A" of complainants' position paper.)

SO ORDERED. 1

Not satisfied therewith petitioners filed a motion for reconsideration in the First Division of the public respondent, National Labor Relations Commission (NLRC), which nevertheless, affirmed the appealed decision and dismissed the appeal for lack of merit in a resolution dated June 30, 1989. Petitioners were ordered to pay the appeal fee in accordance with law.

Hence the herein petition for certiorari with prayer for the issuance of a temporary restraining order wherein the petitioners raised the following issues:

A

THE ARBITER AND THE NLRC DID NOT ACQUIRE JURISDICTION OVER THE PERSONS OF THE PETITIONERS AND, THEREFORE, THE DECISION AND THE RESOLUTION, UNDER DISPUTE, ARE NULL AND VOID.

B

THE DECISION AND THE NLRC RESOLUTION SUFFER FROM A LEGAL AND CONSTITUTIONAL INFIRMITY BECAUSE THEY SANCTION A DEPRIVATION OF PETITIONERS' PROPERTIES WITHOUT DUE PROCESS OF LAW.

C

THE ARBITER AND THE NLRC COMMITTED A GRAVE ABUSE OF DISCRETION IN ADJUDGING PETITIONERS HEREIN AS JOINTLY AND SEVERALLY LIABLE WITH PHILIPPINE INTER-FASHION, INC. TO PAY THE JUDGMENT DEBT.

On September 25, 1989 this Court dismissed the petition for insufficiency in form and substance, having failed to comply with the Rules of Court and Administrative Circular No. 1-88 requiting the verification of the petition. A motion for reconsideration filed by the petitioners of the said resolution was denied on October 16, 1989 for failure to raise any substantial arguments to warrant a modification thereof. However, acting on an urgent motion to include the motion for reconsideration of the resolution of September 25, 1989 in the court's calendar which the Court granted, on November 30, 1989 the Court resolved to set aside said resolutions of September 25, 1989 and October 16, 1989, and to require respondents to comment thereon within ten (10) days from notice thereof. A temporary restraining order was issued enjoining respondents from enforcing or implementing the questioned decision of the labor arbiter affirmed by the NLRC upon a bond to be filed by petitioners in the amount of P100,000.00. However, on February 7, 1990 for failure of petitioner to file the required bond despite extensions of time granted them, the Court resolved to lift the temporary restraining order issued on November 13, 1989.

Now to the merit of the petition.


http://www.lawphil.net/judjuris/juri1990/apr1990/gr_89879_1990.html#rnt1

Petitioners do not question the merits of the decision insofar as PIF is concerned in this proceeding.1âwphi1 The first two issues they raised are to the effect that the public respondents never acquired jurisdiction over them as they have not been served with summons and thus they were deprived due process.

The Court finds these grounds to be devoid of merit. As the record shows while originally it was PIF which was impleaded as respondent before the labor arbiter, petitioners also appeared in their behalf through counsel. Thereafter when the supplemental position paper was filed by complainants, petitioners were impleaded as respondents to which they filed an opposition inasmuch as they filed their own supplemental position papers. They were therefore properly served with summons and they were not deprived of due process.

Petitioners contend however that under the circumstances of the case as officers of the corporation PIF they could not be jointly and severally held liable with the corporation for its liability in this case.

The settled rule is that the corporation is vested by law with a personality separate and distinct from the persons composing it, including its officers as well as from that of any other legal entity to which it may be related. Thus, a company manager acting in good faith within the scope of his authority in terminating the services of certain employees cannot be held personally liable for damages. 2 Mere ownership by a single stockholder or by another corporation of all or nearly all capital stocks of the corporation is not by itself sufficient ground for disregarding the separate corporate personality. 3

As a general rule, officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. 4 However, the legal fiction that a corporation has a personality separate

and distinct from stockholders and members may be disregarded as follows:

This finding does not ignore the legal fiction that a corporation has a personality separate and distinct from its stockholders and members, for, as this Court had held "where the incorporators and directors belong to a single family, the corporation and its members can be considered as one in order to avoid its being used as an instrument to commit injustice," or to further an end subversive of justice. In the case of Claparols vs. CIR involving almost similar facts as in this case, it was also held that the shield of corporate fiction should be pierced when it is deliberately and maliciously designed to evade financial obligations to employees.

To the same effect . . . (are) this Court's rulings in still other cases:

When the notion of legal entity is used as a means to perpetrate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, and or (to) confuse legitimate issues the veil which protects the corporation will be lifted. 5

In this particular case complainants did not allege or show that petitioners, as officers of the corporation deliberately and maliciously designed to evade the financial obligation of the corporation to its employees, or used the transfer of the employees as a means to perpetrate an illegal act or as a vehicle for the evasion of existing obligations, the circumvention of statutes, or to confuse the legitimate issues.

Indeed, in the questioned resolution of the NLRC dated June 30, 1989 there is no finding as to why petitioners were being held jointly and severally liable for the liability and obligation of the corporation except as to invocation of the ruling of this Court in A.C. Ransom Labor Union-CCLU vs. NLRC 6 in that the liability in the cases of

illegal termination of employees extends not only to the corporation as a corporate entity but also to its responsible officers acting in the interest of the corporation or employer.

It must be noted, however, that A.C. Ransom Labor Union-CCLU vs. NLRC the corporation was a family corporation and that during the strike the members of the family organized another corporation which was the Rosario Industrial Corporation to which all the assets of the A.C. Ransom Corporation were transferred to continue its business which acts of such officers and agents of A.C. Ransom Corporation were intended to avoid payment of its obligations to its employees. In such case this Court considered the president of the corporation to be personally liable together with the corporation for the satisfaction of the claim of the employees. 7

Not one of the above circumstances has been shown to be present. Hence petitioners can not be held jointly and severally liable with the PIF corporation under the questioned decision and resolution of the public respondent.

WHEREFORE, the petition is GRANTED and the questioned resolution of the public respondent dated June 30, 1989 is hereby modified by relieving petitioners of any liability as officers of the PIF and holding that the liability shall be solely that of Philippine Inter-Fashion, Inc. No costs.

SO ORDERED.

G.R. No. 85416 July 24, 1990

FRANCISCO V. DEL ROSARIO, petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION and LEONARDO V. ATIENZA, respondents.

CORTES, J.:CORPORATION De FACTO 53







In POEA Case No. 85-06-0394, the Philippine Overseas Employment Administration (POEA) promulgated a decision on February 4, 1986 dismissing the complaint for money claims for lack of merit. The decision was appealed to the National Labor Relations Commission (NLRC), which on April 30, 1987 reversed the POEA decision and ordered Philsa Construction and Trading Co., Inc. (the recruiter) and Arieb Enterprises (the foreign employer) to jointly and severally pay private respondent the peso equivalent of $16,039.00, as salary differentials, and $2,420.03, as vacation leave benefits. The case was elevated to the Supreme Court, but the petition was dismissed on August 31, 1987 and entry of judgment was made on September 24, 1987.

A writ of execution was issued by the POEA but it was returned unsatisfied as Philsa was no longer operating and was financially incapable of satisfying the judgment. Private respondent moved for the issuance of an alias writ against the officers of Philsa. This motion was opposed by the officers, led by petitioner, the president and general manager of the corporation.

On February 12, 1988, the POEA issued a resolution, the dispositive portion of which read:

WHEREFORE, premises considered, let an alias writ of Execution be issued and the handling sheriff is ordered to execute against the properties of Mr. Francisco V. del -Rosario and if insufficient, against the cash and/or surety bond of Bonding Company concerned for the full satisfaction of the judgment awarded.

Petitioner appealed to the NLRC. On September 23, 1988, the NLRC dismissed the appeal. On October 21, 1988, petitioner's motion for reconsideration was denied.

Thus, this petition was filed on October 28, 1988, alleging that the NLRC gravely abused its discretion. On November 10, 1988 the Court issued a temporary

restraining order enjoining the enforcement of the NLRC's decision dated September 23, 1988 and resolution dated October 21, 1988. The petition was given due course on June 14, 1989.

After considering the undisputed facts and the arguments raised in the pleadings, the Court finds grave abuse of discretion on the part of the NLRC.

The action of the NLRC affirming the issuance of an alias writ of execution against petitioner, on the theory that the corporate personality of Philsa should be disregarded, was founded primarily on the following findings of the POEA —

xxx xxx xxx

6. Per the certification issued by the Licensing Division of this Office, it appears that Philsa Construction & Trading Co., Inc., with office address at 126 Pioneer St., Mandaluyong, Metro Manila, represented by Mr. Francisco V. del Rosario, President and General Manager, was formerly a registered construction contractor whose authority was originally issued on July 21, 1978 but was already delisted from the list of agencies/entities on August 15, 1986 for inactivity;

7. Per another certification issued by the Licensing Division of this Office, it also appears that another corporation, Philsa International Placement & Services Corp., composed of practically the same set of incorporators/stockholders, was registered as a licensed private employment agency whose license was issued on November 5, 1981, represented by the same Mr. Francisco V. del Rosario as its President/ General Manager.

and an application of the ruling of the Court in A.C. Ransom Labor Union-CCLU v. NLRC, G.R. No. 69494, June 10, 1986, 142 SCRA 269.

However, we find that the NLRC's reliance on the findings of the POEA and the ruling in A. C. Ransom is totally misplaced.

1. Under the law a corporation is bestowed juridical personality, separate and distinct from its stockholders [Civil Code, Art. 44; Corporation Code, sec. 2]. But when the juridical personality of the corporation is used to defeat public convenience, justify wrong, protect fraud or defend crime, the corporation shall be considered as a mere association of persons [Koppel (Phil.), Inc. v. Yatco, 77 Phil. 496 (1946), citing 1 Fletcher, Cyclopedia of Corporations, 135-136; see also Palay, Inc. v. Clave, G.R. No. 56076, September 21, 1983, 124 SCRA 638], and its responsible officers and/or stockholders shall be held individually liable [Namarco v. Associated Finance Co., Inc., G.R. No. L-20886, April 27, 1967, 19 SCRA 962]. For the same reasons, a corporation shall be liable for the obligations of a stockholder [Palacio v. Fely Transportation Company, G.R. No. L-15121, August 31, 1962, 5 SCRA 1011; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, G.R. No. L-20502, February 26, 1965, 13 SCRA 290], or a corporation and its successor-in-interest shall be considered as one and the liability of the former shall attach to the latter [Koppel v. Yatco, supra; Liddell & Co. v. Collector of Internal Revenue, G.R. No. L-9687, June 30, 1961, 2 SCRA 632].

But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

In this regard we find the NLRC's decision wanting. The conclusion that Philsa allowed its license to expire so as to evade payment of private respondent's claim is not supported by the facts. Philsa's corporate personality therefore remains inviolable.

Consider the following undisputed facts:


(1) Private respondent filed his complaint with the POEA on June 4, 1985;

(2) The last renewal of Philsa's license expired on October 12, 1985;

(3) The POEA dismissed private respondent's complaint on February 4, 1986;

(4) Philsa was delisted for inactivity on August 15, 1986; *

(5) The dismissal of the complaint was appealed to the NLRC and it was only on April 30, 1987 that the judgment awarding differentials and benefits to private respondent was rendered.

Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it was delisted in 1986, there was yet no judgment in favor of private respondent. An intent to evade payment of his claims cannot therefore be implied from the expiration of Philsa's license and its delisting.

Neither will the organization of Philsa International Placement and Services Corp. and its registration with the POEA as a private employment agency imply fraud since it was organized and registered in 1981, several years before private respondent filed his complaint with the POEA in 1985. The creation of the second corporation could not therefore have been in anticipation of private respondent's money claims and the consequent adverse judgment against Philsa

Likewise, substantial identity of the incorporators of the two corporations does not necessarily imply fraud.

The circumstances of this case distinguish it from those in earlier decisions of the Court in labor cases where the veil of corporate fiction was pierced.

In La Campana Coffee Factory, Inc. v. Kaisahan ng Manggagawa sa La Campana (KKM) 93 Phil. 160 (1953), 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 gaugaufactory and the coffee factory were also interchangeable, i.e., the workers in one factory worked also in the other factory.

In Claparols v. Court of Industrial Relations, G.R. No. L-30822, July 31, 1975, 65 SCRA 613, the Claparols 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.

2. As earlier stated, we also find that, contrary to the NLRC'S holding, the ruling in A. C. Ransom is inapplicable to this case. In A. C. Ransom, the Court said:

... 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. [At p. 274.]

The distinguishing marks of fraud were therefore clearly apparent in A. C. Ransom. A new corporation was created, owned by the same family, engaging in the same business and operating in the same compound.

Thus, considering that the non-payment of the workers was a continuing situation, the Court adjudged its President, the "responsible officer" of the corporation, personally liable for the backwages awarded, he being the chief operation officer or "manager" who could be held criminally liable for violations of Republic Act No. 602 (the old Minimum Wage Law.)

In the case now before us, not only has there been a failure to establish fraud, but it has also not been shown that petitioner is the corporate officer responsible for private respondent's predicament. It must be emphasized that the claim for differentials and benefits was actually directed against the foreign employer. Philsa became liable only because of its undertaking to be jointly and severally bound with the foreign employer, an undertaking required by the rules of the POEA [Rule II, sec. 1(d) (3)], together with the filing of cash and surety bonds [Rule 11, sec. 4], in order to ensure that overseas workers shall find satisfaction for awards in their favor.

At this juncture, the Court finds it appropriate to point out that a judgment against a recruiter should initially be enforced against the cash and surety bonds filed with the POEA. As provided in the POEA Rules and Regulations —

... The bonds shall answer for all valid and legal claims arising from violations of the conditions for the grant and use of the license or authority and contracts of employment. The bonds shall likewise guarantee compliance with the provisions of the Labor Code and its implementing rules and regulations relating to recruitment and placement, the rules of the Administration and relevant issuances of the Ministry and all liabilities which the Administration may impose. ... [Rule II, see. 4.]

Quite evidently, these bonds do not answer for a single specific liability, but for all sorts of liabilities of the recruiter to the worker and to the POEA. Moreover, the


obligations guaranteed by the bonds are continuing. Thus, the bonds are subject to replenishment when they are garnished, and failure to replenish shall cause the suspension or cancellation of the recruiter's license [Rule II, sec. 19]. Furthermore, a cash bond shall be refunded to a recruiter who surrenders his license only upon posting of a surety bond of similar amount valid for three (3) years [Rule II, sec. 20]. All these, to ensure recovery from the recruiter.

It is therefore surprising why the POEA ordered execution "against the properties of Mr. Francisco V. del Rosarioand if insufficient, against the cash and/or surety bond of Bonding Company concerned for the till satisfaction of the judgment awarded" in complete disregard of the scheme outlined in the POEA Rules and Regulations. On this score alone, the NLRC should not have affirmed the POEA.

WHEREFORE, the petition is GRANTED and the decision and resolution of the NLRC, dated September 23, 1988 and October 21, 1988, respectively, in POEA Case No. 85-06-0394 are SET ASIDE. The temporary restraining order issued by the Court on November 10, 1988 is MADE PERMANENT.

SO ORDERED.

G.R. No. L-23893 October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant, vs.EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION,defendants. EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.

PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,

vs.JOSE M. VILLARAMA, third-party defendant-appellee.

ANGELES, J.:

This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No. 41845, declaring null and void the sheriff's sale of two certificates of public convenience in favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public convenience; and ordering the private defendants, jointly and severally, to pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The case against the PSC was dismissed.

The rather ramified circumstances of the instant case can best be understood by a chronological narration of the essential facts, to wit:

Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc. (otherwise known as Pantranco), for P350,000.00 with the condition, among others, that the seller (Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer."

Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc. (which shall be referred to hereafter as the Corporation) was organized with a capital stock of P500,000.00 divided into 5,000

shares of the par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, who was Natividad R. Villarama.

In less than a month after its registration with the Securities and Exchange Commission (March 10, 1959), the Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final approval of the sale by the PSC; P49,500.00 one year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the SELLER."

The very same day that the aforementioned contract of sale was executed, the parties thereto immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional authority in favor of the vendee Corporation to operate the service therein involved.1 On May 19, 1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be modified or revoked by the Commission at any time, shall be subject to whatever action that may be taken on the basic application and shall be valid only during the pendency of said application." Before the PSC could take final action on said application for approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public convenience involved therein, namely, those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor,


against Valentin Fernando, defendant, judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in his name.

Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for approval their corresponding contract of sale to the PSC.2 Pantranco therein prayed that it be authorized provisionally to operate the service involved in the said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the pendency of the cases and before a final resolution on the aforesaid applications, the Pantranco shall be the one to operate provisionally the service under the two certificates embraced in the contract between Ferrer and Pantranco. The Corporation took issue with this particular ruling of the PSC and elevated the matter to the Supreme Court,3 which decreed, after deliberation, that until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court, the Corporation should be the one to operate the lines provisionally.

On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for the annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein that all the orders of the PSC relative to the parties' dispute over the said certificates be annulled.

In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had no valid title to the certificates in question because the contract pursuant to which it acquired them from Fernando was subject to a suspensive condition — the approval of the PSC — which has not yet been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the certificates referred to, as well as the sale of the same by Ferrer to Pantranco, were valid and regular, and vested unto Pantranco, a superior right thereto.

Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama and the Corporation, are one and the same; that Villarama and/or the Corporation was disqualified from operating the two certificates in question by virtue of the aforementioned agreement between said Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer."

Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried, and thereafter decision was rendered in the terms, as above stated.

As stated at the beginning, all the parties involved have appealed from the decision. They submitted a joint record on appeal.

Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation) is a distinct and separate entity from Jose M. Villarama; that the restriction clause in the contract of January 8, 1959 between Pantranco and Villarama is null and void; that the Sheriff's sale of July 16, 1959, is likewise null and void; and the failure to award damages in its favor and against Villarama.

Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the sale of

the two certificates in question by Valentin Fernando to the Corporation, is valid. He also assails the award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to award moral damages to him as prayed for in his counterclaim.

The Corporation, on the other hand, prays for a review of that portion of the decision awarding only P5,000.00 as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of exemplary damages.

After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it include existing lines?; (2) Assuming that said stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the affirmative, that said stipulation is valid, did it bind the Corporation?

For convenience, We propose to discuss the foregoing issues by starting with the last proposition.

The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the Corporation, alleging that he did not become such, because he did not have sufficient funds to invest, his wife, however, was an incorporator with the least subscribed number of shares, and was elected treasurer of the Corporation. The finances of the Corporation which, under all concepts in the law, are supposed to be under the control and administration of the treasurer keeping them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the private funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the rights of the stockholders. The following testimony of


Villarama,4 together with the other evidence on record, attests to that effect:

Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You heard the testimony presented here by the bank regarding the initial opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a check drawn by yourself personally. In the direct examination you told the Court that the reason you drew a check for Eighty-Five Thousand Pesos was because you and your wife, or your wife, had spent the money of the stockholders given to her for incorporation. Will you please tell the Honorable Court if you knew at the time your wife was spending the money to pay debts, you personally knew she was spending the money of the incorporators?

A. You know my money and my wife's money are one. We never talk about those things.

Q. Doctor, your answer then is that since your money and your wife's money are one money and you did not know when your wife was paying debts with the incorporator's money?

A. Because sometimes she uses my money, and sometimes the money given to her she gives to me and I deposit the money.

Q. Actually, aside from your wife, you were also the custodian of some of the incorporators here, in the beginning?

A. Not necessarily, they give to my wife and when my wife hands to me I did not know it belonged to the incorporators.

Q. It supposes then your wife gives you some of the money received by her in her capacity as treasurer of the corporation?

A. Maybe.

Q. What did you do with the money, deposit in a regular account?

A. Deposit in my account.

Q. Of all the money given to your wife, she did not receive any check?

A. I do not remember.

Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what is this?

xxx xxx xxx

JUDGE: Reform the question.

Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did your wife give you Fifty-two Thousand Pesos?

A. I have testified before that sometimes my wife gives me money and I do not know exactly for what.

The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was mostly financed by Villarama. Of the P105,000.00 deposited in the First National City Bank of New York, representing the initial paid-up capital of the Corporation, P85,000.00 was covered by Villarama's personal check. The deposit slip for the said amount of P105,000.00 was admitted in evidence as Exh. 23, which shows on its face that P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No. F-50271 of the First National City Bank of New York. The testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of said bank, have proved that the drawer of the check was Jose Villarama himself.

Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the corporation there appears an entry that the treasurer received P95,000.00 as second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for second subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to make vouchers liquidating the sums.7 Thus, it was made to appear that the P95,000.00 was delivered to Villarama in payment for equipment purchased from him, and the P100,000.00 was loaned as advances to the stockholders. The said accountant, however, testified that he was not aware of any amount of money that had actually passed hands among the parties involved,8 and actually the only money of the corporation was the P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned above, P85,000.00 was paid by Villarama's personal check.

Further, the evidence shows that when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by Philippine Bank of Commerce Checks Nos. 992618-B and 993621-B, respectively. These checks have been sufficiently established by Fausto Abad, Assistant Accountant of Manila Trading & Supply Co., from which the trucks were purchased9 and Aristedes Solano, an employee of the Philippine Bank of Commerce,10 as having been drawn by Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing that Villarama had co-mingled his personal funds and transactions with those made in the name of the Corporation, are very illuminating evidence. Villarama has assailed the admissibility of these exhibits, contending that no evidentiary value whatsoever should be given to them since "they were merely photostatic copies of the


originals, the best evidence being the originals themselves." According to him, at the time Pantranco offered the said exhibits, it was the most likely possessor of the originals thereof because they were stolen from the files of the Corporation and only Pantranco was able to produce the alleged photostat copies thereof.

Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of secondary evidence when the original is in the custody of the adverse party, thus: (1) opponent's possession of the original; (2) reasonable notice to opponent to produce the original; (3) satisfactory proof of its existence; and (4) failure or refusal of opponent to produce the original in court.11 Villarama has practically admitted the second and fourth requisites.12 As to the third, he admitted their previous existence in the files of the Corporation and also that he had seen some of them.13 Regarding the first element, Villarama's theory is that since even at the time of the issuance of the subpoena duces tecum, the originals were already missing, therefore, the Corporation was no longer in possession of the same. However, it is not necessary for a party seeking to introduce secondary evidence to show that the original is in the actual possession of his adversary. It is enough that the circumstances are such as to indicate that the writing is in his possession or under his control. Neither is it required that the party entitled to the custody of the instrument should, on being notified to produce it, admit having it in his possession.14 Hence, secondary evidence is admissible where he denies having it in his possession. The party calling for such evidence may introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule is "when the original has been lost, destroyed, or cannot be produced in court."15 The originals of the vouchers in question must be deemed to have been lost, as even the Corporation admits such loss. Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19 and 22.

Taking account of the foregoing evidence, together with Celso Rivera's testimony,16 it would appear that: Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and equipment;17there was no actual payment by the original subscribers of the amounts of P95,000.00 and P100,000.00 as appearing in the books;18 Villarama made use of the money of the Corporation and deposited them to his private accounts;19 and the Corporation paid his personal accounts.20

Villarama himself admitted that he mingled the corporate funds with his own money.21 He also admitted that gasoline purchases of the Corporation were made in his name22 because "he had existing account with Stanvac which was properly secured and he wanted the Corporation to benefit from the rebates that he received."23

The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the Corporation to altogether negative the claim that he was only a part-time general manager. They show beyond doubt that the Corporation is his alter ego.

It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness with the Corporation has been denied by him. On the contrary, he has admitted them with offered excuses.

Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation with the lame excuse that "his wife had requested him to reimburse the amount entrusted to her by the incorporators and which she had used to pay the obligations of Dr. Villarama (her husband) incurred while he was still the owner of Villa Rey Transit, a single proprietorship." But with his admission that he had received P350,000.00 from Pantranco for the sale of the two certificates and one unit,24 it becomes difficult to accept Villarama's

explanation that he and his wife, after consultation,25 spent the money of their relatives (the stockholders) when they were supposed to have their own money. Even if Pantranco paid the P350,000.00 in check to him, as claimed, it could have been easy for Villarama to have deposited said check in his account and issued his own check to pay his obligations. And there is no evidence adduced that the said amount of P350,000.00 was all spent or was insufficient to settle his prior obligations in his business, and in the light of the stipulation in the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price was earmarked for the payments of accounts due to his creditors, the excuse appears unbelievable.

On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co. with his personal checks, his reason was that he was only sharing with the Corporation his credit with some companies. And his main reason for mingling his funds with that of the Corporation and for the latter's paying his private bills is that it would be more convenient that he kept the money to be used in paying the registration fees on time, and since he had loaned money to the Corporation, this would be set off by the latter's paying his bills. Villarama admitted, however, that the corporate funds in his possession were not only for registration fees but for other important obligations which were not specified.26

Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time manager,27he admitted not only having held the corporate money but that he advanced and lent funds for the Corporation, and yet there was no Board Resolution allowing it.28

Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation only renders more credible Pantranco's claim that his control over the corporation, especially in the management and disposition


of its funds, was so extensive and intimate that it is impossible to segregate and identify which money belonged to whom. The interference of Villarama in the complex affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from corporate undertakings. It is the very essence of incorporation that the acts and conduct of the corporation be carried out in its own corporate name because it has its own personality.

The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law.29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime,30 the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.

Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity as a means of evading the obligation of his covenant.31 Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee.32

The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are one and the same, the restrictive clause in the contract between

Villarama and Pantranco does not include the purchase of existing lines but it only applies to application for the new lines. The clause in dispute reads thus:

(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for any TPU service identical or competing with the BUYER. (Emphasis supplied)

As We read the disputed clause, it is evident from the context thereof that the intention of the parties was to eliminate the seller as a competitor of the buyer for ten years along the lines of operation covered by the certificates of public convenience subject of their transaction. The word "apply" as broadly used has for frame of reference, a service by the seller on lines or routes that would compete with the buyer along the routes acquired by the latter. In this jurisdiction, prior authorization is needed before anyone can operate a TPU service,33whether the service consists in a new line or an old one acquired from a previous operator. The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of such period.34

If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an application with the Public Service Commission, this would, in effect, allow the seller just the same to compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous operator, thus defeating the intention of the parties. For what would prevent the seller, under the circumstances, from having a representative or dummy apply in the latter's name and then later on transferring the same by sale to the seller? Since stipulations in a contract is the law between the contracting parties,

Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. (Art. 19, New Civil Code.)

We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the contract of sale between Villarama and Pantranco is significant in that as it now appears, the parties intended to effect the least restriction. We are persuaded, after an examination of the supposed drafts, that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just as broad and comprehensive. At most, it can be said that the re-wording was done merely for brevity and simplicity.

The evident intention behind the restriction was to eliminate the sellers as a competitor, and this must be, considering such factors as the good will35 that the seller had already gained from the riding public and his adeptness and proficiency in the trade. On this matter, Corbin, an authority on Contracts has this to say.36

When one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to get the location, the building, the stock in trade, and the customers. He wishes to step into the seller's shoes and to enjoy the same business relations with other men. He is willing to pay much more if he can get the "good will" of the business, meaning by this the good will of the customers, that they may continue to tread the old footpath to his door and maintain with him the business relations enjoyed by the seller.

... In order to be well assured of this, he obtains and pays for the seller's promise not to reopen business in competition with the business sold.

As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the matter37says:


The law concerning contracts which tend to restrain business or trade has gone through a long series of changes from time to time with the changing condition of trade and commerce. With trifling exceptions, said changes have been a continuous development of a general rule. The early cases show plainly a disposition to avoid and annul all contract which prohibited or restrained any one from using a lawful trade "at any time or at any place," as being against the benefit of the state. Later, however, the rule became well established that if the restraint was limited to "a certain time" and within "a certain place," such contracts were valid and not "against the benefit of the state." Later cases, and we think the rule is now well established, have held that a contract in restraint of trade is valid providing there is a limitation upon either time or place. A contract, however, which restrains a man from entering into business or trade without either a limitation as to time or place, will be held invalid.

The public welfare of course must always be considered and if it be not involved and the restraint upon one party is not greater than protection to the other requires, contracts like the one we are discussing will be sustained. The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be upheld. (Emphasis supplied.)

Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of an agreement suppressing competition, it is, however, merely ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only

along the lines covered by the certificates sold. In view of these limitations, coupled with the consideration of P350,000.00 for just two certificates of public convenience, and considering, furthermore, that the disputed stipulation is only incidental to a main agreement, the same is reasonable and it is not harmful nor obnoxious to public service.38 It does not appear that the ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to operate along the lines in question, thereby establishing monopoly or predominance approximating thereto. We believe the main purpose of the restraint was to protect for a limited time the business of the buyer.

Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or deterioration of the service because of the close supervision of the Public Service Commission.39 This Court had stated long ago,40that "when one devotes his property to a use in which the public has an interest, he virtually grants to the public an interest in that use and submits it to such public use under reasonable rules and regulations to be fixed by the Public Utility Commission."

Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:

... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or business, and which purports to bind the seller not to engage in the same business in competition with the purchaser, is lawful and enforceable. While such covenants are designed to prevent competition on the part of the seller, it is ordinarily neither their purpose nor effect to stifle competition generally in the locality, nor to prevent it at all in a way or to an extent injurious to the public. The business in the hands of the purchaser is carried on just as it was in the hands of the seller; the former merely takes

the place of the latter; the commodities of the trade are as open to the public as they were before; the same competition exists as existed before; there is the same employment furnished to others after as before; the profits of the business go as they did before to swell the sum of public wealth; the public has the same opportunities of purchasing, if it is a mercantile business; and production is not lessened if it is a manufacturing plant.

The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding that the stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement therein sought to be enforced was virtually a division of territory between two operators, each company imposing upon itself an obligation not to operate in any territory covered by the routes of the other. Restraints of this type, among common carriers have always been covered by the general rule invalidating agreements in restraint of trade. 42

Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not to apply for the lifting of restrictions imposed on his certificates of public convenience was not an ancillary or incidental agreement. The restraint was the principal objective. On the other hand, in Red Line Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the line, or trips, or increase of equipment — was not an agreement between the parties but a condition imposed in the certificate of public convenience itself.

Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10 years to "apply" for TPU service along the lines covered by the certificates of public convenience sold by him to Pantranco is valid and reasonable. Having arrived at this conclusion, and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself


the alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint, that the said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from operating the line subject of the prohibition.

To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon Villarama is not against his application for, or purchase of, certificates of public convenience, but merely the operation of TPU along the lines covered by the certificates sold by him to Pantranco. Consequently, the sale between Fernando and the Corporation is valid, such that the rightful ownership of the disputed certificates still belongs to the plaintiff being the prior purchaser in good faith and for value thereof. In view of the ancient rule of caveat emptorprevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was only the right which Fernando, judgment debtor, had in the certificates of public convenience on the day of the sale.45

Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was notified that "by virtue of an Order of Execution issued by the Court of First Instance of Pangasinan, the rights, interests, or participation which the defendant, VALENTIN A. FERNANDO — in the above entitled case may have in the following realty/personalty is attached or levied upon, to wit: The rights, interests and participation on the Certificates of Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines — Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the vendee at auction of said certificates, merely stepped into the shoes of the judgment debtor. Of the same principle is the provision of Article 1544 of the Civil Code, that "If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken

possession thereof in good faith, if it should be movable property."

There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public convenience in question, between the Corporation and Fernando, was not consummated, it being only a conditional sale subject to the suspensive condition of its approval by the Public Service Commission. While section 20(g) of the Public Service Act provides that "subject to established limitation and exceptions and saving provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof, without the approval and authorization of the Commission previously had ... to sell, alienate, mortgage, encumber or lease its property, franchise, certificates, privileges, or rights or any part thereof, ...," the same section also provides:

... Provided, however, That nothing herein contained shall be construed to prevent the transaction from being negotiated or completed before its approval or to prevent the sale, alienation, or lease by any public service of any of its property in the ordinary course of its business.

It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the validity and consummation of the sale.

Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his own version to allege.

Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer) in acquiring the certificates of public convenience in question, despite constructive and actual knowledge on their part of a prior sale executed by Fernando in favor of the said corporation, which necessitated the latter to file the action to annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is entitled to collect

actual and compensatory damages, and attorney's fees in the amount of P25,000.00. The evidence on record, however, does not clearly show that said defendants acted in bad faith in their acquisition of the certificates in question. They believed that because the bill of sale has yet to be approved by the Public Service Commission, the transaction was not a consummated sale, and, therefore, the title to or ownership of the certificates was still with the seller. The award by the lower court of attorney's fees of P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.

Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had suffered and should be awarded moral, exemplary damages and attorney's fees, cannot be entertained, in view of the conclusion herein reached that the sale by Fernando to the Corporation was valid.

Pantranco, on the other hand, justifies its claim for damages with the allegation that when it purchased ViIlarama's business for P350,000.00, it intended to build up the traffic along the lines covered by the certificates but it was rot afforded an opportunity to do so since barely three months had elapsed when the contract was violated by Villarama operating along the same lines in the name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the underhanded manner in which Villarama violated the contract is pertinent in establishing punitive or moral damages. Its contention as to the proper measure of damages is that it should be the purchase price of P350,000.00 that it paid to Villarama. While We are fully in accord with Pantranco's claim of entitlement to damages it suffered as a result of Villarama's breach of his contract with it, the record does not sufficiently supply the necessary evidentiary materials upon which to base the award and there is need for further proceedings in the lower court to ascertain the proper amount.


PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;

2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co. against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and separate from the personality of Jose M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;

3. The case is remanded to the trial court for the reception of evidence in consonance with the above findings as regards the amount of damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered.


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